**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10-Q/A**

**(AmendmentNo. 2)**

**(Mark One)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe quarterly period ended March 31, 2004**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe transition period from           to           **

**COMMISSIONFILE NUMBER 000-29661**

**UTSTARCOM, INC.**

(Exact name of Registrantas specified in its charter)
| **DELAWARE**                                                                      | **52-1782500**                        |
|-----------------------------------------------------------------------------------|---------------------------------------|
| (State of  Incorporation)                                                         | (I.R.S. Employer  Identification No.) |
| **1275 HARBOR BAY PARKWAY,  ALAMEDA, CALIFORNIA**                                 | **94502**                             |
| (Address of  principal executive offices)                                         | (zip code)                            |
| Registrant’s  telephone number, including area code: **(510) 864-8800** |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes    x    No    o

Indicate by check markwhether the Registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act of 1934). Yes    x    No    o

Asof May 4, 2004 there were 113,795,336 shares of the registrant’s commonstock outstanding, par value $0.00125.

 

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**EXPLANATORY NOTE**

UTStarcom, Inc. (the “Company”) originally filedits quarterly report on Form 10-Q for the period ended March 31, 2004with the Securities and Exchange Commission (the “SEC”) on May 10, 2004(the “Original Filing”). As a result of a typographical error in the condensedconsolidated balance sheets for the periods ended March 31, 2004 and December 31,2003 in the Original Filing, the Company filed an amended quarterly report on Form 10-Q/Awith the SEC on May 14, 2004 (“Amendment No. 1”). This Amendment No. 2on Form 10-Q/A (“Amendment No. 2”) is being filed to reflect theadjustments and restatement of its condensed consolidated financial statementsas of and for the three months ended March 31, 2004 and March 31,2003 for certain changes resulting from the 2003 restatement, as describedbelow, and to reflect the adjustments to the December 31, 2003consolidated balance sheet as presented in our amended Annual Report on Form 10-K/Afor the year ended December 31, 2003 as filed with the SEC on April 13,2005.

As part of the financial closing process for the yearended December 31, 2004, the Company identified certain prior year errorsresulting in a restatement which decreased the provision for income taxes andincreased net income by $20.7 million for the year ended December 31,2003. In addition, as a result of the correction of the tax provision, retainedearnings was increased by $20.7 million, additional paid-in capital wasincreased by $0.9 million, income taxes payable was decreased by $2.5 million,other long-term assets were increased by $21.6 million, prepaids were increasedby $2.8 million and other current assets were reduced by $5.3 million, all asof December 31, 2003. There was no net effect on cash provided fromoperating activities as a result of this error.

Theimpact of the restatement on each of the respective quarters in 2003 is asfollows (in thousands):
| ** **                       | ** ** | **Decrease in Income  Tax Expense** | ** ** | **Decrease in Income  Tax Payable** | ** ** | **Increase in  Net Income** | ** ** | **Increase in  Diluted EPS** | ** ** |
|----------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------|------------|----------------------------------------|------------|
| **For the  three months ended:** |       |                                               |       |                                               |       |                                  |       |                                   |       |   |   |   |   |   |   |   |   |
| March 31,  2003             |       |                                               | $          | 3,825                                              |       |                                  |       | $                                      | 3,825      |   |   |   | $ | 3,825 |   |   |   | $ | 0.04 |   |   |
| June 30,  2003              |       |                                               | $          | 4,038                                              |       |                                  |       | $                                      | 4,038      |   |   |   | $ | 4,038 |   |   |   | $ | 0.03 |   |   |
| September 30, 2003          |       |                                               | $          | 6,064                                              |       |                                  |       | $                                      | 6,064      |   |   |   | $ | 6,064 |   |   |   | $ | 0.04 |   |   |

 

During the evaluation of the errors related to theincome tax provision, the Company determined that an additionalreclassification of reported 2003 results was required. Specifically, cost ofsales and other income both increased by $3.5 million for the year ended December 31,2003 to properly classify certain incentive payments received for exports andvalue-added taxes in China. This adjustment related solely to the fourthquarter of 2003.

In addition to the errors in the 2003 tax provision,the Company had not correctly identified a related party that is deemed avariable interest entity and for whom the Company is considered the primarybeneficiary in accordance with FASB Interpretation No. 46 (“FIN 46”). TheCompany has corrected its 2003 financial statements to reflect the consolidationof this variable interest entity, MDC Holding Limited (“MDC Holding”) and itsaffiliated entities (MDC Holding and such affiliated entities are referred to,collectively, as “MDC”). At December 31, 2003, this consolidation resultedin a $5.5 million increase in total assets and a $0.7 million increase in totalliabilities. There was no effect on net income as a result of thisconsolidation. The consolidation occurred upon the Company’s adoption of FIN 46at the beginning of the fourth quarter of 2003.

Furthermore, an impairment charge of $7.4 million, netof taxes of $1.3 million, was recorded to reflect an impairment of MDCequipment subject to a revenue share arrangement. Due to the uncertaintiessurrounding the customer’s subscriber income and ability to pay under thisarrangement, the Company determined that an impairment charge should have beenrecorded in the fourth quarter of 2003 when these conditions should have beenidentified. Accordingly, an impairment charge of $7.4 million, net 

1

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of tax, was recorded,which decreased both total assets and equity by $7.4 million at December 31,2003. This adjustment was recorded in the fourth quarter of 2003.

The Companyidentified certain revisions in classification during the preparation of the2003 restated financial statements. Therefore, for the consolidated financialstatements for the quarter ended March 31, 2004, the following adjustmentswere made to conform to the 2003 restated financial statements:

(1)         Cost of sales for relatedparty revenue transactions is presented separately from cost of sales fornon-related party revenue transactions for all periods presented;

(2)         Certain other long-termassets increased and intangible assets decreased by $1.6 million;

(3)         A related party which is31% owned by an individual related to a member of the Company’s Board ofDirectors and associated transactions have been identified. See Note 18 to theConsolidated Financial Statements.

On April 13, 2005, the Company filed Amendment No. 1to its Annual Report on Form 10-K/A for the year ended December 31,2003 to reflect the restatement of its consolidated financial statements forthe year then ended and to disclose the impact on quarters ended March 31,2003, June 30, 2003 and September 30, 2003.

The results of operations for the year ended December 31,2004 and the results of operations for each of the quarters ended March 31,2004, June 30, 2004 and September 30, 2004 have not been impacted bythe restatement of 2003 financial results discussed above. However, the beginningand ending balances of certain balance sheet accounts for the quarters of 2004were affected and therefore have been adjusted in this Amendment No. 2 toreflect the 2003 restatement.

Changes have been made to the following items in thisAmendment as a result of the 2003 restatement.

Part I

·       Item1.      Condensed Consolidated FinancialStatements

·       Item2.      Management’s Discussion andAnalysis of Financial Condition and Results of Operations

·       Item3.      Quantitative and QualitativeDisclosures about Market Risk

·       Item4.      Controls and Procedures

Amendment No. 2 does not reflect events that haveoccurred after the May 10, 2004 filing date of the Quarterly Report on Form 10-Qthat the Company originally filed with the SEC, or modify or update thedisclosures presented in the original Form 10-Q, except to reflectthe adjustments and restatement described above. Accordingly, this Form 10-Q/Ashould be read in conjunction with our filings with the SEC subsequent to thefiling of the original Form 10-Q.

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**TABLE OF CONTENTS**
| **PART I.**  | **FINANCIAL  INFORMATION**                                                                                                        |   |
|-------------------|-----------------------------------------------------------------------------------------------------------------------------------|--------|
| Item 1.           | Condensed  Consolidated Financial Statements                                                                                      | 4      |
| ** **        | Condensed Consolidated  Balance Sheets as of March 31, 2004 (unaudited) and December 31,  2003                          | 4      |
| ** **        | Condensed Consolidated  Statements of Operations for the three month periods ended March 31,  2004 and 2003 (unaudited) | 5      |
| ** **        | Condensed Consolidated  Statements of Cash Flows for the three month periods ended March 31,  2004 and 2003 (unaudited) | 6      |
| ** **        | Notes  to Condensed Consolidated Financial Statements (unaudited)                                                                 | 7      |
| Item 2.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                       | 25     |
| Item 3.           | Quantitative  and Qualitative Disclosures about Market Risk                                                                       | 54     |
| Item 4.           | Controls  and Procedures                                                                                                          | 56     |
| **PART II.** | **OTHER INFORMATION**                                                                                                             |   |
| Item 1.           | Legal  Proceedings                                                                                                                | 63     |
| Item 2.           | Changes  in Securities, Use of Proceeds and Issuer Purchases of Equity Securities                                                 | 63     |
| Item 3.           | Defaults  Upon Senior Securities                                                                                                  | 64     |
| Item 4.           | Submission  of Matters to a Vote of Security Holders                                                                              | 64     |
| Item 5.           | Other  Information                                                                                                                | 64     |
| Item 6.           | Exhibits  and Reports on Form 8-K                                                                                            | 64     |
|              | Signatures                                                                                                                        |   |
|              | Exhibit Index                                                                                                                |   |

 

3

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**PART I—FINANCIALINFORMATION**

**ITEM1—CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**UTSTARCOM, INC.CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)(In thousands, except share and per share data)**
| ** **                                                                                                                                                                               | ** ** | **March 31,**        | ** ** | **December 31,**     | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                                                                                                                                                                               | ** ** | **2004**                  | ** ** | **2003**                  | ** ** |
| ** **                                                                                                                                                                               | ** ** | **(As Restated)(2)** | ** ** | **(As Restated)(1)** | ** ** |
| **ASSETS**                                                                                                                                                                               |       |                      |       |                      |       |   |   |   |   |
| Current assets:                                                                                                                                                                          |       |                      |       |                      |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                                |       |                      | $          | 728,712                   |       |   |   | $ | 377,747 |   |   |
| Short-term investments                                                                                                                                                                   |       |                      | 41,330     |                      |       |   | 48,617 |   |   |
| Accounts receivable, net  of allowances for doubtful accounts of $37,084 and $31,172 at March 31,  2004 and December 31, 2003, respectively                                    |       |                      | 403,044    |                      |       |   | 325,288 |   |   |
| Accounts receivable,  related parties                                                                                                                                                    |       |                      | 29,797     |                      |       |   | 43,944 |   |   |
| Notes receivable                                                                                                                                                                         |       |                      | 43,824     |                      |       |   | 11,362 |   |   |
| Inventories                                                                                                                                                                              |       |                      | 318,106    |                      |       |   | 257,065 |   |   |
| Deferred  costs/Inventories at customer sites under contracts                                                                                                                            |       |                      | 409,323    |                      |       |   | 542,060 |   |   |
| Prepaids                                                                                                                                                                                 |       |                      | 117,510    |                      |       |   | 139,103 |   |   |
| Restricted cash and  short-term investments                                                                                                                                              |       |                      | 30,864     |                      |       |   | 24,404 |   |   |
| Other current  assets                                                                                                                                                                    |       |                      | 50,719     |                      |       |   | 48,499 |   |   |
| Total current assets                                                                                                                                                                     |       |                      | 2,173,229  |                      |       |   | 1,818,089 |   |   |
| Property, plant and equipment,  net                                                                                                                                                      |       |                      | 201,725    |                      |       |   | 187,039 |   |   |
| Long-term investments                                                                                                                                                                    |       |                      | 24,101     |                      |       |   | 24,066 |   |   |
| Goodwill                                                                                                                                                                                 |       |                      | 100,180    |                      |       |   | 100,180 |   |   |
| Intangible assets, net                                                                                                                                                                   |       |                      | 41,256     |                      |       |   | 44,051 |   |   |
| Other long-term assets                                                                                                                                                                   |       |                      | 72,405     |                      |       |   | 70,625 |   |   |
| Total assets                                                                                                                                                                             |       |                      | $          | 2,612,896                 |       |   |   | $ | 2,244,050 |   |   |
| **LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS’  EQUITY**                                                                                                                        |       |                      |       |                      |       |   |   |   |   |
| Current liabilities:                                                                                                                                                                     |       |                      |       |                      |       |   |   |   |   |
| Accounts payable                                                                                                                                                                         |       |                      | $          | 287,963                   |       |   |   | $ | 251,122 |   |   |
| Income taxes payable                                                                                                                                                                     |       |                      | 23,882     |                      |       |   | 14,265 |   |   |
| Customer advances                                                                                                                                                                        |       |                      | 294,100    |                      |       |   | 450,499 |   |   |
| Deferred revenue                                                                                                                                                                         |       |                      | 57,209     |                      |       |   | 44,958 |   |   |
| Other current liabilities                                                                                                                                                                |       |                      | 176,629    |                      |       |   | 173,911 |   |   |
| Total current liabilities                                                                                                                                                                |       |                      | 839,783    |                      |       |   | 934,755 |   |   |
| Long-term debt                                                                                                                                                                           |       |                      | 410,655    |                      |       |   | 410,655 |   |   |
| Total liabilities                                                                                                                                                                        |       |                      | 1,250,438  |                      |       |   | 1,345,410 |   |   |
| Commitments and  contingencies (Note 17)                                                                                                                                                 |       |                      |       |                      |       |   |   |   |   |
| Minority interest in  consolidated subsidiaries                                                                                                                                          |       |                      | 5,359      |                      |       |   | 5,309 |   |   |
| Stockholders’ equity:                                                                                                                                                               |       |                      |       |                      |       |   |   |   |   |
| Common stock: $0.00125  par value; authorized: 750,000,000 shares; issued and outstanding:  114,368,691 and 104,272,477 at March 31, 2004 and December 31,  2003, respectively |       |                      | 144        |                      |       |   | 131 |   |   |
| Additional paid-in  capital                                                                                                                                                              |       |                      | 1,115,972  |                      |       |   | 654,483 |   |   |
| Deferred stock  compensation                                                                                                                                                             |       |                      | (7,484     | )                         |       |   | (7,761 | ) |   |
| Retained earnings                                                                                                                                                                        |       |                      | 244,607    |                      |       |   | 243,058 |   |   |
| Accumulated other  comprehensive income                                                                                                                                                  |       |                      | 3,860      |                      |       |   | 3,420 |   |   |
| Total stockholders’  equity                                                                                                                                                         |       |                      | 1,357,099  |                      |       |   | 893,331 |   |   |
| Total liabilities, minority interest and stockholders’  equity                                                                                                                      |       |                      | $          | 2,612,896                 |       |   |   | $ | 2,244,050 |   |   |

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(1)             See the Company’s filing on Form 10-K/A filed withthe SEC.

(2)             See Note 24 to the condensed consolidatedfinancial statements.

See accompanying notes to condensed consolidated financial statements.

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**UTSTARCOM, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)(In thousands, except per share data)**
| ** **                                                  | ** ** | **Three months ended March 31,** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                  | ** ** | **2004**                                             | ** ** | **2003** | ** ** |
| ** **                                                  | ** ** | ** **                                           | ** ** | **(As Restated)(1)** | ** ** |
| Net sales                                                   |       |                                                 |       |   |   |   |   |
| Unrelated parties                                           |       | $                                                    | 610,731    |   |   | $ | 272,004 |   |   |
| Related parties                                             |       | 11,561                                               |       |   | 58,516 |   |   |
|                                                        |       | 622,292                                              |       |   | 330,520 |   |   |
| Cost of sales                                               |       |                                                 |       |   |   |   |   |
| Unrelated parties                                           |       | 441,527                                              |       |   | 195,638 |   |   |
| Related parties                                             |       | 4,731                                                |       |   | 22,197 |   |   |
| Gross profit                                                |       | 176,034                                              |       |   | 112,685 |   |   |
| Operating expenses:                                         |       |                                                 |       |   |   |   |   |
| Selling, general and administrative                         |       | 66,943                                               |       |   | 37,583 |   |   |
| Research and development                                    |       | 45,658                                               |       |   | 26,812 |   |   |
| In-process research and development                         |       | —                                               |       |   | 1,320 |   |   |
| Amortization of intangible assets                           |       | 2,973                                                |       |   | 695 |   |   |
| Total operating  expenses                                   |       | 115,574                                              |       |   | 66,410 |   |   |
| Operating income                                            |       | 60,460                                               |       |   | 46,275 |   |   |
| Interest income                                             |       | 1,354                                                |       |   | 943 |   |   |
| Interest expense                                            |       | (1,082                                               | )          |   | (639 | ) |   |
| Other income, net                                           |       | 8,785                                                |       |   | 4,186 |   |   |
| Equity in loss of  affiliated companies                     |       | (997                                                 | )          |   | (975 | ) |   |
| Income before  income taxes and minority interest           |       | 68,520                                               |       |   | 49,790 |   |   |
| Income tax  expense                                         |       | 13,704                                               |       |   | 8,622 |   |   |
| Minority interest  in earnings of consolidated subsidiaries |       | (50                                                  | )          |   | — |   |   |
| Net income                                                  |       | $                                                    | 54,766     |   |   | $ | 41,168 |   |   |
| Basic earnings  per share                                   |       | $                                                    | 0.48       |   |   | $ | 0.38 |   |   |
| Diluted earnings per share                                  |       | $                                                    | 0.40       |   |   | $ | 0.37 |   |   |
| Weighted average  shares used in per-share calculation:     |       |                                                 |       |   |   |   |   |
| —Basic                                                 |       | 114,614                                              |       |   | 107,358 |   |   |
| —Diluted                                               |       | 139,325                                              |       |   | 111,953 |   |   |

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(1)          See the Company’s filingon Form 10-K/A filed with the SEC.

See accompanying notes to condensed consolidated financial statements.

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**UTSTARCOM, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(In thousands)**
| ** **                                                                     | ** ** | **Three months ended March 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2004**                                             | ** ** | **2003** | ** ** |
| ** **                                                                     | ** ** | **(As Restated)(2)**                            | ** ** | **(As Restated)(1)** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                          |       |                                                 |       |   |   |   |   |   |   |
| Net income                                                                     |       |                                                 | $          | 54,766 |   |   |   | $ | 41,168 |   |   |
| Adjustments to reconcile net income to net cash used  in operating activities: |       |                                                 |       |   |   |   |   |   |   |
| Depreciation and  amortization                                                 |       |                                                 | 16,438     |   |   |   | 7,910 |   |   |
| Non-qualified stock  option exercise tax benefits                              |       |                                                 | 2,862      |   |   |   | 1,449 |   |   |
| Net loss on sale of  assets                                                    |       |                                                 | 190        |   |   |   | 47 |   |   |
| In-process research and  development costs                                     |       |                                                 | —     |   |   |   | 1,320 |   |   |
| Amortization of debt  issuance costs                                           |       |                                                 | 582        |   |   |   | 201 |   |   |
| Warrants adjustment to  fair value                                             |       |                                                 | 226        |   |   |   | 80 |   |   |
| Loss on sale of  investment                                                    |       |                                                 | —     |   |   |   | 80 |   |   |
| Net gain on long-term  investments                                             |       |                                                 | (34        | ) |   |   | — |   |   |
| Stock compensation  expense                                                    |       |                                                 | 77         |   |   |   | 715 |   |   |
| Provision for doubtful  accounts                                               |       |                                                 | 6,252      |   |   |   | 8,214 |   |   |
| Inventory provision                                                            |       |                                                 | 9,439      |   |   |   | 2,495 |   |   |
| Equity in loss of  affiliated companies                                        |       |                                                 | 997        |   |   |   | 975 |   |   |
| Deferred income taxes                                                          |       |                                                 | (2,236     | ) |   |   | (842 | ) |   |
| Minority interest in  earnings of consolidated subsidiary                      |       |                                                 | 50         |   |   |   | — |   |   |
| Changes in operating assets and liabilities:                                   |       |                                                 |       |   |   |   |   |   |   |
| Accounts receivable                                                            |       |                                                 | (69,862    | ) |   |   | (41,431 | ) |   |
| Inventories                                                                    |       |                                                 | (70,480    | ) |   |   | (131,067 | ) |   |
| Deferred  costs/Inventories at customer sites under contracts                  |       |                                                 | 132,737    |   |   |   | (241,230 | ) |   |
| Other current and  non-current assets                                          |       |                                                 | (13,279    | ) |   |   | (52,095 | ) |   |
| Accounts payable                                                               |       |                                                 | 36,841     |   |   |   | 219,905 |   |   |
| Income taxes payable                                                           |       |                                                 | 9,617      |   |   |   | 2,097 |   |   |
| Customer advances                                                              |       |                                                 | (156,399   | ) |   |   | 87,245 |   |   |
| Deferred revenue                                                               |       |                                                 | 12,251     |   |   |   | 5,715 |   |   |
| Other current liabilities                                                      |       |                                                 | 1,671      |   |   |   | 12,206 |   |   |
| Net cash used in  operating activities                                         |       |                                                 | (27,294    | ) |   |   | (74,843 | ) |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                          |       |                                                 |       |   |   |   |   |   |   |
| Additions to property,  plant and equipment                                    |       |                                                 | (27,740    | ) |   |   | (15,169 | ) |   |
| Investment in affiliates                                                       |       |                                                 | (1,000     | ) |   |   | (3,074 | ) |   |
| Purchase of businesses,  net of cash acquired                                  |       |                                                 | —     |   |   |   | (1,292 | ) |   |
| Purchase of intangible  assets                                                 |       |                                                 | (125       | ) |   |   | — |   |   |
| Change in restricted cash                                                      |       |                                                 | (58        | ) |   |   | (2,377 | ) |   |
| Purchase of short-term  investments                                            |       |                                                 | (50,575    | ) |   |   | (16,319 | ) |   |
| Proceeds from sale of  short-term investments                                  |       |                                                 | 51,460     |   |   |   | 91,876 |   |   |
| Net cash (used in)  provided by investing activities                           |       |                                                 | (28,038    | ) |   |   | 53,645 |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                          |       |                                                 |       |   |   |   |   |   |   |
| Issuance of stock, net of  expenses                                            |       |                                                 | 9,224      |   |   |   | 4,026 |   |   |
| Purchase of bond hedge  and call option                                        |       |                                                 | —     |   |   |   | (43,792 | ) |   |
| Net proceeds from  borrowing                                                   |       |                                                 | —     |   |   |   | 391,431 |   |   |
| Repurchase of stock                                                            |       |                                                 | (78,155    | ) |   |   | — |   |   |
| Proceeds from equity  offering                                                 |       |                                                 | 474,554    |   |   |   | — |   |   |
| Net cash provided by  financing activities                                     |       |                                                 | 405,623    |   |   |   | 351,665 |   |   |
| Effect of exchange rate  changes on cash                                       |       |                                                 | 674        |   |   |   | (270 | ) |   |
| Net increase in cash and  cash equivalents                                     |       |                                                 | 350,965    |   |   |   | 330,197 |   |   |
| CASH AND CASH EQUIVALENTS  AT BEGINNING OF PERIOD                              |       |                                                 | 377,747    |   |   |   | 231,944 |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                     |       |                                                 | $          | 728,712 |   |   |   | $ | 562,141 |   |   |

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(1)    See the Company’s filing on Form 10-K/A filed withthe SEC.

(2)    See Note24 to the condensed consolidated financial statements.

See accompanying notes to condensed consolidated financial statements.

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**UTSTARCOM, INC.NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**1.**   BASISOF PRESENTATION:

The accompanying unaudited condensed consolidatedfinancial statements include the accounts of UTStarcom, Inc. (the “Company”)and its wholly and majority owned subsidiaries. All significant intercompanyaccounts and transactions have been eliminated in the preparation of thecondensed consolidated financial statements. The Company also consolidatesvariable interest entities (“VIE”) as defined by Financial Accounting StandardsBoard Interpretation No. 46 (“FIN 46”), “Consolidation of VariableInterest Entities.” The minority interests in consolidated subsidiaries andequity in affiliated companies are shown separately in the condensedconsolidated financial statements. Investments in affiliated companies areaccounted for using the cost or equity method, as applicable.

The accompanying financial statements as of March 31,2004 and for the three months ended March 31, 2004 and 2003 have beenprepared by the Company, without audit, pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”). Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with generally accepted accounting principles have beencondensed or omitted pursuant to such rules and regulations. The December 31,2003 balance sheet was derived from audited financial statements, but does notinclude all disclosures required by generally accepted accounting principles.These condensed consolidated financial statements should be read in conjunctionwith the Company’s audited December 31, 2003 financial statements,including the notes thereto, and the other information set forth in the Company’sAmended Annual Report on Form 10-K/A for the year ended December 31,2003 as filed with the SEC on April 13, 2005.

In the opinion ofmanagement, the accompanying condensed consolidated financial statementsreflect all adjustments (consisting of only normal recurring adjustments)considered necessary for a fair presentation of the Company’s financialcondition, the results of its operations and its cash flows for the periodsindicated. The results of operations for the three months ended March 31,2004 are not necessarily indicative of the operating results for the full year.

**2.**   REVENUERECOGNITION:

Revenues from sales of telecommunications equipmentare recognized when persuasive evidence of an arrangement exists, delivery ofthe product has occurred, customer acceptance has been obtained, the fee isfixed or determinable and collectability is reasonably assured. If the paymentdue from the customer is not fixed or determinable due to extended paymentterms, revenue is recognized as payments become due from the customer, assumingall other criteria for revenue recognition are met. Any payments received priorto revenue recognition are recorded as customer advances. Normal payment termsdiffer for various reasons amongst different customer regions, depending uponcommon business practices for customers within a region. Shipping and handlingcosts are recorded as revenues and costs of revenues. Any expected losses oncontracts are recognized immediately.

Sales may be generated from complex contractualarrangements that require significant revenue recognition judgments,particularly in the areas of multiple element arrangements. Where multipleelements exist in an arrangement, the arrangement fee is allocated to thedifferent elements based upon verifiable objective evidence of the fair valueof the elements, as governed under EITF 00-21, and SEC Staff AccountingBulletin No. 104 “SAB 104.” Multiple element arrangements primarilyinvolve the sale of Personnel Access Systems (“PAS”), a family of wirelessaccess handsets, wireless consumer products and core infrastructure equipmentor Internet Protocol-based PAS (“iPAS”) wireless access 

7

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systems that employ microcell radio technology and specialized handsets, allowing service providers tooffer subscribers both mobile and fixed access to telephone services. Thesemultiple element arrangements include the sale of PAS or iPAS equipment withhandsets, installation and training and the provision of such equipment todifferent locations for the same customer. Revenue is recognized as each elementis earned, namely upon installation and acceptance of equipment or delivery ofhandsets, provided that the fair value of the undelivered element(s) hasbeen determined, the delivered element has stand-alone value, there is no rightof return on delivered element(s), and the vendor is in control of theundelivered element(s).

Final acceptance is required for revenue recognitionwhen installation services are not considered perfunctory. Final acceptanceindicates that the customer has fully accepted delivery of equipment and theCompany is entitled to the full payment. The Company will not recognize revenuebefore final acceptance is granted by the customer if acceptance is consideredsubstantive to the transaction. Additionally, the Company does not recognizerevenue when cash payments are received from customers for transactions that donot have the customer’s final acceptance. The Company records these cashreceipts as customer advances, and defers revenue recognition until finalacceptance is received.

Where multiple elements exist in an arrangement thatincludes software and the software is considered more than incidental to theequipment or services in the arrangement, software and software-relatedelements are recognized under the provisions of Statement of Position 97-2, asamended, and Emerging Issues Task Force Issue No. 03-05. The Companyallocates revenues to each element of software arrangements based onvendor-specific objective evidence (“VSOE”). VSOE of each element is based onthe price charged when the same element is sold separately. The Company usesthe residual method to recognize revenue when an arrangement includes one ormore elements to be delivered at a future date and VSOE of the fair value ofall the undelivered elements exists. Under the residual method, the fair valueof the undelivered elements is deferred and the remaining portion of thearrangement fee is recognized as revenue. If evidence of fair value of one ormore undelivered elements does not exist, revenue is deferred and recognizedwhen delivery of those elements occurs or when fair value can be established.

The Company recognizes revenue for system integration,installation and training upon completion of performance if all other revenuerecognition criteria are met. Other service revenue, such as that related tomaintenance and support contracts, is recognized ratably over the contractterm. Revenues from services were less than 10% of revenues for all periods.

The Company also sells products through resellers.Revenue is generally recognized when the standard price protection period,which ranges from 30 to 90 days, has lapsed. If collectability cannot bereasonably assured in a reseller arrangement, revenue is recognized uponsell-through to the end customer and receipt of cash. There may be additionalobligations in reseller arrangements such as inventory rotation, or stockexchange rights on the product. As such, revenue is recognized in accordancewith Statement of Financial Accounting Standards No. 48 “Revenue RecognitionWhen Right of Return Exists” (“SFAS 48”). The Company has developed reasonableestimates for stock exchanges. Estimates are derived from historical experiencewith similar types of sales of similar products.

The assessment of collectability is also a factor indetermining whether revenue should be recognized. The Company assessescollectability based on a number of factors, including payment history and thecredit-worthiness of the customer. The Company does not request collateral fromits customers. In international sales, the Company often requires letters ofcredit from its customers that can be drawn on demand if the customer defaultson its payment. If the Company determines that collection of a payment is notreasonably assured, the Company recognizes revenue at the time collectionbecomes reasonably assured, which is generally upon receipt of cash.

8

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Because of the nature of doing business in China andother emerging markets, the Company’s billings and/or customer payments may notcorrelate with the contractual payment terms and the Company generally does notenforce contractual payment terms prior to final acceptance. Accordingly,accounts receivable are not booked until the Company recognizes the relatedcustomer revenue. Advances from customers are recognized when the Company hascollected cash from the customer, prior to recognizing revenue. Deferredrevenue is recorded if there are undelivered elements after final acceptancehas been obtained.

The Company provides awarranty on its equipment and handset sales for a period generally ranging fromone to three years from the time of final acceptance. The Company provides forthe expected cost of product warranties at the time that revenue is recognized,based on an assessment of past warranty experience.

**3.**   EARNINGSPER SHARE:

Basic earnings per share is computed by dividing netincome available to holders of common stock by the weighted average number ofshares of the Company’s common stock outstanding during the period. Dilutedearnings per share is determined by adjusting net income as reported by theeffect of dilutive securities and increasing the number of shares bypotentially dilutive shares of common stock outstanding during the period.Potentially dilutive shares of common stock consist of employee stock options,a written call option, warrants and convertible subordinated notes.

Thefollowing is a summary of the calculation of basic and diluted earnings pershare (in thousands, except per share data):
| ** **                                                              | ** ** | **Three months ended March 31,** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                              | ** ** | **2004**                                             | ** ** | **2003** | ** ** |
| ** **                                                              | ** ** | ** **                                           | ** ** | **(As Restated)(1)** | ** ** |
| Numerator:                                                              |       |                                                 |       |   |   |   |   |   |   |
| Net income (for basic EPS computation)                                  |       |                                                 | $          | 54,766 |   |   |   | $ | 41,168 |   |   |
| Effect of Dilutive Securities 7¤8%  Convertible Subordinated Notes |       |                                                 | 917        |   |   |   | — |   |   |
| Net income adjusted for dilutive securities                             |       |                                                 | $          | 55,683 |   |   |   | $ | 41,168 |   |   |
| Denominator:                                                            |       |                                                 |       |   |   |   |   |   |   |
| Shares used to compute basic EPS                                        |       |                                                 | 114,614    |   |   |   | 107,358 |   |   |
| Dilutive common stock  equivalent shares:                               |       |                                                 |       |   |   |   |   |   |   |
| Stock options                                                           |       |                                                 | 6,326      |   |   |   | 3,937 |   |   |
| Written call  option                                                    |       |                                                 | 1,046      |   |   |   | — |   |   |
| Conversion of  convertible subordinated notes                           |       |                                                 | 16,919     |   |   |   | — |   |   |
| Warrants                                                                |       |                                                 | 30         |   |   |   | 28 |   |   |
| Other                                                                   |       |                                                 | 390        |   |   |   | 630 |   |   |
| Shares used to  compute diluted EPS                                     |       |                                                 | 139,325    |   |   |   | 111,953 |   |   |
| Basic earnings per share                                                |       |                                                 | $          | 0.48 |   |   |   | $ | 0.38 |   |   |
| Diluted earnings  per share                                             |       |                                                 | $          | 0.40 |   |   |   | $ | 0.37 |   |   |

----

(1)          See the Company’s filingon Form 10-K/A filed with the SEC.

Certain potential shares related to employee stockoptions and warrants outstanding during the three months ended March 31,2004 and 2003 were excluded in the diluted per share computations, since theirexercise prices were greater than the average market price of the Company’scommon stock during 

9

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the period and,accordingly, their effect is anti-dilutive. For the three months ended March 31,2004 and 2003, these shares totaled 1.6 million with a weighted averageexercise price of $38.04 per share and 5.6 million shares with a weightedaverage exercise price of $21.80 per share, respectively. The Company hasoutstanding warrants for issuance of 32,000 shares at the exercise price of$2.50 per share.

On March 31, 2004, each of the Company’s 7¤8%convertible subordinated notes outstanding was eligible for conversion intoshares of common stock. For each $1,000 of aggregate principal amount of notesconverted, the Company will deliver approximately 42.0345 shares of commonstock, if the Company’s stock price exceeds a specified threshold. At March 31,2004, the closing price of the Company’s common stock exceeded the specifiedthreshold, which had the effect of increasing the denominator for dilutedearnings per share by 16.9 million. Additionally, during the three monthsended March 31, 2004, the average price of the Company’s stock exceededthe specified strike prices of the convertible bond hedge and call optiontransactions that the Company entered into to reduce the potential dilutionfrom conversion of the notes. Both the bond hedge and call option transactionsmay be settled at the Company’s option either in cash or net shares and expireon March 1, 2008. Using the treasury stock method, under Statement ofFinancial Accounting Standards No. 128, “Earnings Per Share” (“SFAS 128”),this would have the effect of decreasing the denominator for diluted earningsper share by 5.1 million shares for the bond hedge transaction, andincreasing the denominator for diluted earnings per share by1.0 million shares for the call option transaction. However, only thedilutive effect of the 1.0 million shares with respect to the call optiontransaction is included in the Company’s diluted earnings per share calculationabove. The convertible bond hedge, under SFAS 128, is alwaysanti-dilutive.

The net income for thediluted EPS computation reflects the reduction in interest expense of$0.9 million for the three months ended March 31, 2004, that wouldresult from an assumed conversion of the 7¤8% convertiblesubordinated notes.

**4.**   STOCK-BASEDCOMPENSATION:

The Company accounts for employee stock option grantsin accordance with Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees” (“APB 25”) and has adopted the disclosure-onlyalternative of SFAS No. 123, as amended by SFAS No. 148, “Accountingfor Stock-Based Compensation” (“SFAS 123”). Under APB 25, compensationexpense is based on the difference, if any, on the date of grant between thefair value of the common stock and the exercise price of the option.

The fair value of warrants, options or stock exchangedfor services from non-employees is expensed over the period benefited. Thewarrants and options are valued using the Black-Scholes option-pricing model.

10

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Thefollowing table illustrates the effect on net income and earnings per share ifthe Company had applied the fair value recognition provisions of SFAS No. 123to stock-based employee compensation (in thousands, except per sharedata):
| ** **                                                                                                              | ** ** | **Three months ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                                              | ** ** | **2004**                                             | ** ** | **2003** | ** ** |
| ** **                                                                                                              | ** ** | ** **                                           | ** ** | **(As Restated)(1)** | ** ** |
| Basic                                                                                                                   |       |                                                 |       |   |   |   |   |   |   |
| Net income:                                                                                                             |       |                                                 |       |   |   |   |   |   |   |
| As reported                                                                                                             |       |                                                 | $          | 54,766 |   |   |   | $ | 41,168 |   |   |
| Add: Stock-based employee compensation expense  included in reported net income, net of related tax effects             |       |                                                 | 55         |   |   |   | 499 |   |   |
| Deduct: Total compensation expense determined under  fair value based method for all awards, net of related tax effects |       |                                                 | (7,966     | ) |   |   | (6,315 | ) |   |
| Pro forma net  income                                                                                                   |       |                                                 | $          | 46,855 |   |   |   | $ | 35,352 |   |   |
| Basic income per  share:                                                                                                |       |                                                 |       |   |   |   |   |   |   |
| As reported                                                                                                             |       |                                                 | $          | 0.48 |   |   |   | $ | 0.38 |   |   |
| Pro forma                                                                                                               |       |                                                 | $          | 0.41 |   |   |   | $ | 0.33 |   |   |
| Diluted                                                                                                                 |       |                                                 |       |   |   |   |   |   |   |
| Net income:                                                                                                             |       |                                                 |       |   |   |   |   |   |   |
| As reported                                                                                                             |       |                                                 | $          | 54,766 |   |   |   | $ | 41,168 |   |   |
| Effect of dilutive securities 7¤8% Convertible subordinated notes                                                  |       |                                                 | 917        |   |   |   | — |   |   |
| Add: Stock-based employee compensation expense  included in reported net income, net of related tax effects             |       |                                                 | 55         |   |   |   | 499 |   |   |
| Deduct: Total compensation expense determined under  fair value method for all awards, net of related tax effects       |       |                                                 | (7,966     | ) |   |   | (6,315 | ) |   |
| Pro forma net  income                                                                                                   |       |                                                 | $          | 47,772 |   |   |   | $ | 35,352 |   |   |
| Diluted income  per share:                                                                                              |       |                                                 |       |   |   |   |   |   |   |
| As reported                                                                                                             |       |                                                 | $          | 0.40 |   |   |   | $ | 0.37 |   |   |
| Pro forma                                                                                                               |       |                                                 | $          | 0.35 |   |   |   | $ | 0.33 |   |   |

----

(1)          Seethe Company’s filing on Form 10-K/A filed with the SEC.

**5.**   COMPREHENSIVEINCOME:

Thereconciliation of net income to comprehensive income for the three months endedMarch 31, 2004 and 2003 is as follows (in thousands):
| ** **                                    | ** ** | **Three months ended March 31,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                    | ** ** | **2004**                                             | ** ** | **2003** | ** ** |
| ** **                                    | ** ** | ** **                                           | ** ** | **(As Restated)(1)** | ** ** |
| Net income                                    |       |                                                 | $          | 54,766 |   |   |   | $ | 41,168 |   |   |
| Unrealized gains  (losses) on investments     |       |                                                 | (233       | ) |   |   | 574 |   |   |
| Change in  cumulative translation adjustments |       |                                                 | 674        |   |   |   | (34 | ) |   |
| Total comprehensive  income                   |       |                                                 | $          | 55,207 |   |   |   | $ | 41,708 |   |   |

----

(1)          See the Company’s filingon Form 10-K/A filed with the SEC.

11

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**6.**   CASH, CASH EQUIVALENTS AND SHORT-TERMINVESTMENTS: 

Cash and cash equivalents consist of instruments withmaturities of three months or less at the date of purchase. All of the Company’sshort-term investments are classified as available-for-sale. There were noavailable-for-sale securities included in cash and cash equivalents at March 31,2004 or December 31, 2003. Short-term investments, consisting ofavailable-for-sale securities, were $41.3 million and $48.6 million at March 31,2004 and December 31, 2003, respectively. These available-for-salesecurities consist of government-backed notes, commercial paper, floating ratecorporate bonds and fixed income corporate bonds. These investments arerecorded at fair value. Any unrealized holding gains or losses are reported asa component of comprehensive income. Realized gains and losses are reported inearnings. 

The Company accepts banknotes receivable with maturity dates between three and six months from itscustomers in China in the normal course of business. The Company may discountthese notes with banking institutions in China. A sale of these notes isreflected as a reduction of other current assets and the proceeds of thesettlement of these notes are included in cash flows from operating activitiesin the consolidated statement of cash flows. There were zero and $35.5 millionof bank notes receivable sold during the three months ended March 31, 2004and 2003, respectively. These notes are not included in the Company’sconsolidated balance sheets as the criteria for sale treatment established byStatement of Financial Accounting Standards No. 140, “Accounting forTransfers and Servicing of Financial Assets and Extinguishment of Liabilities”(“SFAS 140”), has been met. Under SFAS 140, upon a transfer, thetransferor or entity must derecognize financial assets when control has beensurrendered and the transferee obtains control over the assets. In addition,the transferred assets have been isolated from the transferor, beyond the reachof its creditors, and the transferee has the right, without conditions orconstraints, to pledge or exchange the assets it has received. The costs ofsettling or transferring these notes receivable were insignificant for thethree months ended March 31, 2003. Bank notes receivable were $57.0million and $11.5 million at March 31, 2004 and December 31, 2003,respectively. 

**7.**   RESTRICTED CASH AND SHORT-TERMINVESTMENTS: 

At March 31, 2004, the Company had restrictedcash and short-term investments of $30.9 million primarily comprised of $26.9million of restricted short-term investments for standby letters of credit andrestricted cash of a $3.8 million time deposit required for Japanese taxpurposes. At December 31, 2003, the Company had restricted cash andshort-term investments of $24.4 million primarily comprised of $20.5 millionof restricted short-term investments for standby letters of credit andrestricted cash of a $3.7 million time deposit required for Japanese taxpurposes. 

The Company issues standbyletters of credit primarily to support international sales activities outsideof China. When the Company submits a bid for a sale, often the potentialcustomer will require that the Company issue a bid bond or a standby letter ofcredit to demonstrate its commitment through the bid process. In addition, theCompany may be required to issue standby letters of credit as guarantees foradvance customer payments upon contract signing or performance guarantees. Thestandby letters of credit usually expire six to nine months from date ofissuance without being drawn by the beneficiary thereof. 

**8.**   ACCOUNTSAND NOTES RECEIVABLE: 

The Company acceptscommercial notes receivable with maturity dates between three and six monthsfrom its customers in China in the normal course of business. The Company maydiscount these notes with banking institutions in China. A sale of these notesis reflected as a reduction of notes receivable and the proceeds of thesettlement of these notes are included in cash flows from operating activitiesin the consolidated statement of cash flows. There were zero and $19.3 millionof notes receivable sold during the three months ended March 31, 2004 and2003, respectively. These notes are not included in the Company’s 

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consolidatedbalance sheets as the criteria for sale treatment established by SFAS 140, hasbeen met. The costs of settling or transferring these notes receivable were$0.1 million for the three months ended March 31, 2003, and were includedin other income, net in the Consolidated Statements of Operations. Notesreceivable available for sale were $43.8 million and $11.4 million at March 31,2004 and December 31, 2003, respectively. 

**9.**   SUPPLEMENTAL DISCLOSURES OF CASH FLOWINFORMATION: 
| ** **                        | ** ** | **Three months ended March 31,** | ** ** |
|-----------------------------------|------------|------------------------------------------------------|------------|
| ** **                        | ** ** | **2004**                                             | ** ** | **2003** | ** ** |
| ** **                        | ** ** | **(in thousands)**                              | ** ** |
| Cash paid during the  period for: |       |                                                 |       |   |   |   |   |   |   |
| Interest                          |       |                                                 | $          | 1,768 |   |   |   | $ | 103 |   |   |
| Income taxes                      |       |                                                 | $          | 2,426 |   |   |   | $ | 4,833 |   |   |

 
| ** **                                           | ** ** | **Three months ended March 31,** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                           | ** ** | **2004**                                             | ** ** | **2003** | ** ** |
| ** **                                           | ** ** | **(in thousands)**                              | ** ** |
| Non-cash operating  activities were as follows:      |       |                                                 |       |   |   |   |   |   |   |
| Accounts receivable  transferred to notes receivable |       |                                                 | $          | 48,988 |   |   |   | $ | 29,347 |   |   |
|                                                      |            |                                                      |            |  |  |  |  |  |  |  |  |

 

**10.**   INVENTORIES AND DEFERREDCOSTS/INVENTORIES AT CUSTOMER SITES UNDER CONTRACTS: 

As of March 31,2004 and December 31, 2003, total inventories consist of the following (inthousands):
| ** **                                                      | ** ** | **March 31  2004**   | ** ** | **December 31,  2003** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|
| ** **                                                      | ** ** | **(As Restated)(2)** | ** ** | **(As Restated)(1)**   | ** ** |
| ** **                                                      | ** ** | **(in thousands)**   | ** ** |
| *Inventories*                                                   |       |                      |       |                        |       |   |   |   |   |
| Raw materials                                                   |       |                      | $          | 71,163                      |       |   |   | $ | 66,753 |   |   |
| Work-in-process                                                 |       |                      | 41,859     |                        |       |   | 51,116 |   |   |
| Finished goods                                                  |       |                      | 62,305     |                        |       |   | 48,206 |   |   |
| Inventories at  customer sites without contracts                |       |                      | 142,779    |                        |       |   | 90,990 |   |   |
|                                                            |       |                      | $          | 318,106                     |       |   |   | $ | 257,065 |   |   |
| *Deferred costs/Inventories at customer sites  under contracts* |       |                      |       |                        |       |   |   |   |   |
| Finished goods                                                  |       |                      | $          | 409,323                     |       |   |   | $ | 542,060 |   |   |

----

(1)          See the Company’s filingon Form 10-K/A filed with the SEC.

(2)          SeeNote 24 to the condensed consolidated financial statements.

**11.**   STOCKHOLDERS’EQUITY: 

On January 14, 2004, the Company sold12.1 million shares of common stock at $39.25 per share in a privatelynegotiated transaction to an institution, for net proceeds of approximately$474.6 million. The net proceeds are intended to fund strategic and generalcorporate activities, including, but not limited to, acquisitions, investments,working capital or capital expenditures. 

On March 12, 2004, the Company’s Board ofDirectors approved a stock repurchase program, authorizing the Company’srepurchase of up to 5,000,000 shares of its outstanding common stock over aperiod of 6 months. The Board approved an additional repurchase of 1,623,000shares in a privately negotiated transaction with an institution. As of March 31,2004, the Company repurchased a total of 

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approximately 2.6 millionshares under this program at an average price of $30.43 per share, for a totalcash outflow of $78.2 million. 

The Company had$9.2 million and $4.0 million of net proceeds from the exercise ofstock options for the three months ended March 31, 2004 and 2003,respectively. 

**12.**   DEBT:

Thefollowing represents the outstanding borrowings at March 31, 2004 and December 31,2003 (in thousands):
| **Note**                        | ** ** | ** ** | ** ** | **Rate**                | ** ** | **Maturity**              | ** ** | **March 31, 2004** | ** ** | **December 31, 2003** | ** ** |
|---------------------------------|------------|------------|------------|-------------------------|------------|---------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                      | ** ** | ** ** | ** ** | ** **              | ** ** | **(As Restated)(2)** | ** ** | **(As Restated)(1)**    | ** ** |
| Notes Payable                   |       | 0          | %          | April  - June 2004 |       |                      | $          | 1,044                        |       |                            |       | $ | 1 |   |   |
| Bank Loan                       |       | 4.94       | %          | January 2006       |       |                      | 8,155      |                         |       |                            | 8,155      |   |   |
| Convertible  Subordinated Notes |       | 7/8        | %          | March 1,  2008     |       |                      | 402,500    |                         |       |                            | 402,500    |   |   |
| Total Debt                      |       |       |       |                    |       |                      | $          | 411,699                      |       |                            |       | $ | 410,656 |   |   |
| Long-term debt                  |       |       |       |                    |       |                      | 410,655    |                         |       |                            | 410,655    |   |   |
| Short-term debt                 |       |       |       |                    |       |                      | $          | 1,044                        |       |                            |       | $ | 1 |   |   |

----

(1)          See the Company’s filingon Form 10-K/A filed with the SEC.

(2)          See Note 24 to thecondensed consolidated financial statements.

The Company has available borrowing facilities of$390.5 million as of March 31, 2004. $336.2 million of thesefacilities expire in 2004 and $54.3 million of these facilities expirebetween 2008 and 2010 with an interest rate of 6.21%, and the Company has notguaranteed any debt not included in the consolidated balance sheet. 

Occasionally, the Company issues short-term notespayable to its vendors in lieu of trade accounts payable. The payment terms arenormally three to six months and are typically non-interest bearing. The Companyhad $1.0 million of these notes at March 31, 2004 included in othercurrent liabilities. 

On March 12, 2003, the Company completed anoffering of $402.5 million of convertible subordinated notes due March 1,2008 to qualified buyers pursuant to Rule 144A under the Securities Act of1933. The notes bear interest at a rate of 7¤8%per annum and are convertible into the Company’s common stock at a conversionprice of $23.79 per share and are subordinated to all present and future seniordebt of the Company. Holders of the notes may convert their notes only if: (i) theprice of the Company’s common stock issuable upon conversion of a note reachesa specified threshold, (ii) specified corporate transactions occur, or (iii) thetrading price for the notes falls below certain thresholds. At the initialconversion price, each $1,000 principal amount of notes will be convertibleinto approximately 42.0345 shares of common stock. 

The Company has a bank loan in connection with apurchase of long-term asset resulting from the consolidation of MDC Holding andits affiliated entities (“MDC”). On January 10, 2003, a third partyestablished a bank loan with Shanghai Pudong Development Bank for the purchaseof the long-term asset. The Company assumed the obligations of the bank loanand related asset on January 23, 2003, which were subsequently transferredto MDC on December 31, 2003. The bank loan of $8.2 million bears interestat a rate of 4.94% per annum, and expires on January 10, 2006. At March 31,2004, the Company did not serve as legal obligor for the bank loan. 

Concurrent with theissuance of the convertible notes, the Company entered into a convertible bondhedge and call option transaction at a cost of $43.8 million. The convertiblebond hedge allows the company to purchase 16,918,873 shares of its common stockat $23.79 per share from the other party to the 

14

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agreement.The written call option allows the holder to purchase 16,918,873 shares of theCompany’s common stock from the Company at $32.025 per share. Both the bondhedge and call option transactions may be settled at the Company’s optioneither in cash or net shares and expire on March 1, 2008. The Companyrecorded these instruments at cost, and their carrying value at March 31,2004 approximates their original cost. The convertible bond hedge and calloption transactions are expected to reduce the potential dilution fromconversion of the notes. The options have been included in stockholders’ equityin accordance with the guidance in Emerging Issues Task Force Issue No. 00-19,“Accounting for Derivative Financial Instruments Indexed to, and PotentiallySettled in, a Company’s Own Stock.” 

**13.**   WARRANTY OBLIGATIONS AND OTHERGUARANTEES: 

**Warranty obligations are as follows(in thousands):**
| ** **                                        | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                        | ** ** | **2004**                                             | ** ** | **2003** | ** ** |
| Beginning of  period                              |       |                                                 | $          | 26,267 |   |   |   | $ | 13,297 |   |   |
| Accruals for  warranties issued during the period |       |                                                 | 9,841      |   |   |   | 8,283 |   |   |
| Adjustments to  accruals for changes in estimates |       |                                                 | 167        |   |   |   | (4,552 | ) |   |
| Settlements made  during the period               |       |                                                 | (6,751     | ) |   |   | (4,504 | ) |   |
| Balance at end of period                          |       |                                                 | $          | 29,524 |   |   |   | $ | 12,524 |   |   |

 

Certain of the Company’s sales contracts includeprovisions under which customers would be indemnified by the Company in theevent of, among other things, a third-party claim against the customer forintellectual property rights infringement related to the Company’s products.There are no limitations on the maximum potential future payments under theseguarantees. The Company has accrued no amounts in relation to these provisionsas no such claims have been made and the Company believes it has valid,enforceable rights to the intellectual property embedded in its products. 

The Company issues standbyletters of credit primarily to support international sales activities outsideof China. When the Company submits a bid for a sale, often the potentialcustomer will require that the Company issue a bid bond or a standby letter ofcredit to demonstrate its commitment through the bid process. In addition, theCompany may be required to issue standby letters of credit as guarantees foradvance customer payments upon contract signing or performance guarantees. Thestandby letters of credit usually expire six to nine months from date ofissuance without being drawn by the beneficiary thereof. 

**14.**   LONG-TERMINVESTMENTS: 

TheCompany’s investments are as follows (in thousands):
| ** **                                   | ** ** | **March 31, 2004** | ** ** | **December 31, 2003** | ** ** |
|----------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Softbank China                               |       |                         | $          | 5,294                           |       |   |   | $ | 5,308 |   |   |
| Cellon  International                        |       |                         | 8,000      |                            |       |   | 8,000 |   |   |
| Restructuring  Fund No. 1               |       |                         | 1,838      |                            |       |   | 1,861 |   |   |
| Global Asia  Partners L.P.                   |       |                         | 1,653      |                            |       |   | 1,653 |   |   |
| Fiberxon Inc.                                |       |                         | 3,000      |                            |       |   | 2,000 |   |   |
| InterWave  Communications International Ltd. |       |                         | 2,795      |                            |       |   | 3,319 |   |   |
| Joint Venture  with Matsushita               |       |                         | —     |                            |       |   | 517 |   |   |
| Others                                       |       |                         | 1,521      |                            |       |   | 1,408 |   |   |
| Total                                        |       |                         | $          | 24,101                          |       |   |   | $ | 24,066 |   |   |

 

15

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*Softbank China*

The Company has a$5.3 million investment in Softbank China, an investment fund establishedby SOFTBANK CORP. focused on investments in Internet companies in China. Thisinvestment permits the Company to participate in the anticipated growth of Internet-relatedbusinesses in China. SOFTBANK CORP. and its related companies are significantstockholders of the Company. The Company’s investment constitutes 10% of thefunding for Softbank China, with SOFTBANK CORP. contributing the remaining 90%.The fund has a separate management team, and none of the Company’s employeesare employed by the fund. Many of the fund’s investments are and will be inprivately held companies, many of which are still in the start-up ordevelopment stages. These investments are inherently risky as the markets forthe technologies or products the companies have under development are typicallyin the early stages and may never materialize. The Company accounts for thisinvestment under the cost method and recorded insignificant losses and lossesof $0.1 million due to an other-than-temporary decline in the carrying value ofthis investment during the three months ended March 31, 2004 and 2003,respectively.

*Restructuring Fund*

During fiscal 2002, the Company invested$2.0 million in Restructuring Fund No. 1, a venture capitalinvestment limited partnership established by SOFTBANK INVESTMENT CORP., anaffiliate of SOFTBANK CORP. SOFTBANK America Inc., an entity affiliatedwith SOFTBANK CORP., is a significant stockholder of the Company. The fundfocuses on leveraged buyout investments in companies in Asia undergoingrestructuring or bankruptcy procedures. The total fund offering is expected tobe between approximately $150.0 million and $226.0 million, with eachinvestor contributing a minimum of $0.8 million.

The fund has a separatemanagement team, and none of the Company’s employees are employed by the fund.The Company accounts for this investment under the equity method of accounting.During the three months ended March 31, 2004 the Company recordedinsignificant equity losses. There were no gains or losses for the three monthsended March 31, 2003.

*Global AsiaPartners, L.P.*

In June 2002, theCompany invested $1.0 million in Global Asia Partners L.P., and anadditional $1.0 million in June 2003, with a commitment to invest upto a maximum of $5.0 million. The remaining amount is due at such timesand in such amounts as shall be specified in one or more future capital callsto be issued by the general partner. The fund size is anticipated to be$10.1 million and the fund was formed to make private equity investmentsin private or pre-IPO technology and telecommunications companies. The fund’sgeographic focus is on technology investments in Asia, in particular India andChina. The Company accounts for this investment under the equity method ofaccounting. During the three months ended March 31, 2004 and 2003, theCompany recorded no losses associated with this investment.

*Interwave*

During 2002, the Companypurchased approximately 5.8 million shares of common stock of InterWaveCommunications, International Ltd. Inc., a technology company listed onNasdaq, for approximately $3.0 million. In addition, the Company receivedwarrants to purchase 2.0 million shares of InterWave’s common stock at$0.21 per share. The Company’s holdings were adjusted for a 1:10 reverse stocksplit on April 30, 2003, and were 0.6 million shares of common stockand warrants to purchase 0.2 million shares of InterWave’s common stock at$2.10 per share. The warrants were valued at $0.5 million at March 31,2004, using the Black-Scholes option-pricing model. The Company recorded a lossof $0.2 million and $0.1 million for the three months ended March 31, 2004and 2003, respectively, to reflect the decline in the fair value of thewarrants. The Company recorded the decrease in the carrying 

16

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value ofthese common stock securities of $0.3 million and $0.2 million for thethree months ended March 31, 2004 and 2003, respectively, in othercomprehensive income in equity.

*Matsushita*

In July, 2002, the Companyentered into a joint venture agreement with Matsushita Communication IndustrialCo., Ltd., a stockholder of the Company, to jointly design and develop,manufacture and sell telecommunication products. The Company has a 49%ownership interest in the joint venture company, which has a registered sharecapital of $10.0 million. The cash consideration of $4.9 millionpayable by the Company was paid in October 2002. As the Company does nothave voting control over significant matters of the joint venture company, theinvestment in and results of operations of the joint venture company areaccounted for using the equity method of accounting. The Company recordedequity losses of $1.0 million and $1.0 million for the three months ended March 31,2004 and 2003, respectively. The equity loss for the quarter ended March 31,2004 is recorded as a liability.

*Other investments*

The Company has alsoinvested directly in a number of private technology-based companies in the earlystages of development. These investments are accounted for on the cost basis.The Company continually evaluates the carrying value of these investments forpossible impairment based on the achievement of business objectives andmilestones, the financial condition and prospects of these companies and otherrelevant factors. During the three months ended March 31, 2004 and 2003,there were insignificant valuation adjustments in respect of these privatetechnology investments.

**15.   GOODWILL AND INTANGIBLE ASSETS:**

As of March 31,2004 and December 31, 2003, goodwill and other acquired intangible assetsconsisted of the following (in thousands):
| ** **                     | ** ** | **March 31, 2004** | ** ** | **December 31, 2003** | ** ** |
|--------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                     | ** ** | ** **                   | ** ** | **(As Restated)(1)**       | ** ** |
| ** **                     | ** ** | **(in thousands)**      | ** ** |
| Goodwill                       |       |                         | $          | 113,003                         |       |   |   | $ | 113,003 |   |   |
| Less accumulated  amortization |       |                         | (12,823    | )                               |       |   | (12,823 | ) |   |
|                           |       |                         | $          | 100,180                         |       |   |   | $ | 100,180 |   |   |
| Identified intangible  assets: |       |                         |       |                            |       |   |   |   |   |
| Existing technology            |       |                         | $          | 23,630                          |       |   |   | $ | 23,630 |   |   |
| Less accumulated  amortization |       |                         | (8,749     | )                               |       |   | (7,255 | ) |   |
|                           |       |                         | $          | 14,881                          |       |   |   | $ | 16,375 |   |   |
| Customer relationships         |       |                         | $          | 27,820                          |       |   |   | $ | 27,820 |   |   |
| Less accumulated  amortization |       |                         | (2,318     | )                               |       |   | (1,623 | ) |   |
|                           |       |                         | $          | 25,502                          |       |   |   | $ | 26,197 |   |   |
| Trade names                    |       |                         | $          | 940                             |       |   |   | $ | 940 |   |   |
| Less accumulated  amortization |       |                         | (392       | )                               |       |   | (274 | ) |   |
|                           |       |                         | $          | 548                             |       |   |   | $ | 666 |   |   |
| Backlog                        |       |                         | $          | 1,950                           |       |   |   | $ | 1,950 |   |   |
| Less accumulated  amortization |       |                         | (1,625     | )                               |       |   | (1,137 | ) |   |
|                           |       |                         | $          | 325                             |       |   |   | $ | 813 |   |   |
| Total intangible assets        |       |                         | $          | 41,256                          |       |   |   | $ | 44,051 |   |   |

----

(1)   Seethe Company’s filing on Form 10-K/A filed with the SEC.

17

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Amortization expense was $3.0 million and$0.7 million for the three months ended March 31, 2004 and 2003,respectively. The estimated aggregate amortization expense for intangibles foreach of the five years beginning the year ended December 31, 2005 through2009 is $7.7 million, $5.9 million, $5.6 million,$4.0 million and $2.8 million, respectively.

Goodwilland intangible assets remained the same during the three months ended March 31,2004. The estimated useful life of purchased technology is from one to fiveyears, the estimated useful life of customer relationships is ten years, andthe estimated useful lives of backlog and trade names are from one to twoyears.

**16.   SEGMENT REPORTING:**

The Company sells wireless, wireline and switchingplatforms to operators in both fast growth and established telecommunicationsmarkets around the world. The Company primarily operates in two geographicareas, China and other regions. The chief operating decision makers evaluateperformance, make operating decisions, and allocate resources based onconsolidated financial data. Gross profit, operating income, income fromoperations, and income taxes are not allocated to specific individualdepartments within the organization. In accordance with SFAS No. 131 “Disclosuresabout Segments of an Enterprise and Related Information,” the Company isconsidered a single reportable segment. The Company is required to disclosecertain information about product revenues, information about geographic areas,information about major customers, and information about long-lived assets.

China sales accounted for 92% and 81% of net sales forthe three months ended March 31, 2004 and 2003, respectively. The Companygroups all of its China customers together by province and treats each provinceas one customer since that is the level at which purchasing decisions are made.At March 31, 2004 and 2003, there were approximately 31 such customers.Giving effect to this consolidation, for the three months ended March 31,2004, the Guangdong province accounted for 24% of net sales. For the threemonths ended March 31 2003, sales to the Hei Long Jiang province accountedfor 14%.

Geographicalarea and product sales data are as follows (in thousands): 
| ** **                   | ** ** | **Three months ended March 31,** | ** ** |
|------------------------------|------------|------------------------------------------------------|------------|
| ** **                   | ** ** | **2004**                                             | ** ** | ** ** | ** ** | **2003** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **(in thousands)**                              | ** ** |
| ***Sales  by region***       |       |                                                 |       |   |   |   |   |   |   |
| China                        |       | $                                                    | 570,566    |   | 92 | % | $ | 268,929 |   | 81 | % |
| Japan                        |       | 19,427                                               |       | 3 | % | 59,821 |   | 18 | % |
| Other                        |       | 32,299                                               |       | 5 | % | 1,770 |   | 1 | % |
| **TOTAL  NET SALES**         |       | $                                                    | 622,292    |   | 100 | % | $ | 330,520 |   | 100 | % |
| ***Sales  by product line*** |       |                                                 |       |   |   |   |   |   |   |
| Wireless  infrastructure     |       | $                                                    | 336,517    |   | 54 | % | $ | 124,360 |   | 38 | % |
| Subscriber  handsets         |       | 236,420                                              |       | 38 | % | 139,959 |   | 42 | % |
| Wireline products            |       | 49,355                                               |       | 8 | % | 66,201 |   | 20 | % |
| **TOTAL NET SALES**          |       | $                                                    | 622,292    |   | 100 | % | $ | 330,520 |   | 100 | % |

 

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Long-livedassets by geography, consisting of property, plant and equipment, goodwill andintangible assets, are as follows (in thousands): 
| ** **              | ** ** | **March 31**         | ** ** | **December 31,**     | ** ** |
|-------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **              | ** ** | **2004**                  | ** ** | **2003**                  | ** ** |
| ** **              | ** ** | **(As Restated)(2)** | ** ** | **(As Restated)(1)** | ** ** |
| U.S.                    |       |                      | $          | 148,527                   |       |   |   | $ | 155,240 |   |   |
| Foreign                 |       |                      | 202,811    |                      |       |   | 184,407 |   |   |
| Total long-lived assets |       |                      | $          | 351,338                   |       |   |   | $ | 339,647 |   |   |

----

(1)          See the Company’s filingon Form 10-K/A filed with the SEC.

(2)          SeeNote 24 to the condensed consolidated financial statements.

**17.   COMMITMENTS AND CONTINGENCIES:**

*Joint VentureFunding:*

Pursuant to the jointventure agreement with Matsushita, the Company is jointly liable for the lossesincurred in the operations of the joint venture up to the maximum of itsinvestment in the entity. At March 31, 2004, the losses had exceeded thisamount; however, the Company had accrued additional losses of approximately$1.0 million due to its commitment to fund an additional investment of $9.3million during the second quarter of 2004.

*Investment Commitments:*

As of March 31, 2004,the Company had invested a total of $2.0 million in Global Asia PartnersL.P. The fund size is anticipated to be $10.1 million and the fund wasformed to make private equity investments in private or pre-IPO technology andtelecommunications companies in Asia. The Company has a commitment to invest upto a maximum of $5.0 million. The remaining amount is due at such timesand in such amounts as shall be specified in one or more future capital callsto be issued by the general partner.

*PurchaseCommitments:*

The Company is obligatedto purchase raw materials and work-in-process inventory under various ordersfrom one supplier, all of which should be fulfilled without adverseconsequences material to the operations or financial condition of the Company.As of March 31, 2004, total open commitments under these purchase ordersare approximately $1.0 million.

*Litigation:*

On October 31, 2001, a complaint was filed inUnited States District Court for the Southern District of New York against theCompany, some of its directors and officers and various underwriters for itsinitial public offering. Substantially similar actions were filed concerningthe initial public offerings for more than 300 different issuers, and the caseswere coordinated as In re Initial Public Offering Securities Litigation, 21 MC92. In April 2002, a consolidated amended complaint was filed in thematter against the Company, captioned In re UTStarcom, Initial Public OfferingSecurities Litigation, Civil Action No. 01-CV-9604. Plaintiffs allegeviolations of the Securities Act of 1933 and the Securities Exchange Act of1934 through undisclosed improper underwriting practices concerning theallocation of IPO shares in exchange for excessive brokerage commissions,agreements to purchase shares at higher prices in the aftermarket, andmisleading analyst reports. Plaintiffs seek unspecified damages on behalf of apurported class of purchasers of the Company’s common stock between March 2,2000 and December 6, 2000. The Company’s directors and officers have beendismissed without prejudice pursuant to a stipulation. On February 19,2003, the 

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Court granted in part anddenied in part a motion to dismiss brought by defendants including theCompany. The order dismisses all claims against the Company except for a claimbrought under Section 11 of the Securities Act of 1933, which alleges thatthe Company’s initial public offering registration statement contained untruestatements of material fact and omitted to state material facts required to bestated in the registration statement, or necessary to make the statementstherein not misleading. A proposal has been made for the settlement and releaseof claims against the issuer defendants, including UTStarcom. The settlement issubject to a number of conditions, including approval of the proposed settlingparties and the court. If the settlement does not occur, and litigation againstUTStarcom continues, UTStarcom believes it has valid defenses and intends todefend the case vigorously. The Company is unable to currently estimate theloss, if any, associated with the above litigation.

TheCompany is a party to other litigation matters and claims that are normal inthe course of operations, and while the results of such litigation matters andclaims cannot be predicted with certainty, the Company believes that the finaloutcome of such matters will not have a material adverse impact on itsfinancial position or results of operations.

**18.   RELATED PARTY TRANSACTIONS:**

*Softbank*

The Company recognized revenue of $11.6 millionand $58.5 million for the three months ended March 31, 2004 and 2003,respectively, with respect to sales of telecommunications equipment to SBBC, anaffiliate of SOFTBANK America Inc., which is a significant stockholder ofthe Company. SBBC offers asynchronous digital subscriber line (“ADSL”) coveragethroughout Japan, which is marketed under the name “YAHOO BB!”. The Companyprovides ADSL technology to SBBC. The contract was competitively bid and theterms of this contract were on terms no more favorable than those withunrelated parties. Included in accounts receivable at March 31, 2004 and December 31,2003 were $29.8 million and $43.9 million, respectively, related to thisagreement. There were no amounts included in deferred revenue in respect ofthis agreement at March 31, 2004 and December 31, 2003.

The Company has invested in Softbank China andRestructuring Fund No. 1, which are investment vehicles established bySOFTBANK CORP. and its affiliates. See Note 14.

On April 5, 2003, theCompany repurchased 8.0 million shares of common stock beneficially ownedby SOFTBANK America Inc., at a purchase price of $17.385 per share. Thetotal cost of the repurchase was $139.6 million including transactionfees. In connection with this repurchase transaction, SOFTBANKAmerica Inc. entered into an agreement with the Company not to offer, sellor otherwise dispose of the Company’s common stock for a period of one year,subject to a number of exceptions. As of March 31, 2004, SOFTBANKAmerica Inc. beneficially owned approximately 12.8% of the Company’soutstanding stock.

*Starcom Products, Inc.*

TheCompany obtains engineering consulting and employee placement services fromStarcom Products, Inc. (“Starcom”), which is 31% owned by an individualrelated to a member of the Company’s Board of Directors. The Company paid $0.2million and $0.2 million for the three months ended March 31, 2004 and2003, respectively, for engineering consulting and employee placement servicesfrom Starcom.

**19.   COUNTRY RISKS:**

Approximately 92% and 81% of the Company’s net salesfor the three months ended March 31, 2004 and 2003, respectively, weremade in China. Accordingly, the Company’s business, financial condition andresults of operations are likely to be influenced by the political, economicand legal environment in China 

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and by the general stateof China’s economy. As such, the Company’s operations in China are subject tospecial considerations and significant risks not typically associated with companiesin the United States. The Company’s results may be adversely affected by, amongother things, changes in the political, economic, competitive and socialconditions in China, including changes in governmental policies with respect tolaws and regulations, changes in China’s telecommunications industry andregulatory rules and policies, anti-inflationary measures, currencyconversion and remittance abroad, and rates and methods of taxation.

Under China’s current regulatory structure, thecommunications products that the Company offers in China must meet governmentand industry standards, and a network access license for the equipment must beobtained. Without the license, the equipment may not be connected to publictelecommunications networks or sold in China. Moreover, the Company must ensurethat the quality of the telecommunications equipment for which it has obtaineda network access license is stable and reliable, and may not lower the qualityor performance of other installed licensed products. China’s State Council’sproduct quality supervision department, in concert with China’s Ministry ofInformation Industry, performs spot checks to track and supervise the qualityof licensed telecommunications equipment and publishes the results of such spotchecks.

Approximately3% and 18% of the Company’s sales for the three months ended March 31,2004 and 2003, respectively, were made in Japan. Accordingly, the political,economic and legal environment and the general state of Japan’s economy mayinfluence the Company’s business, financial condition and results ofoperations.

**20.   INCOMETAX ASSETS AND LIABILITIES:**

Inestablishing its deferred income tax assets and liabilities, the Company makesjudgments and interpretations based on the enacted tax laws and published taxguidance applicable to its operations. The Company records deferred tax assetsand liabilities and evaluates the need for valuation allowances to reduce thedeferred tax assets to realizable amounts. The likelihood of a material changein the Company’s expected realization of these assets is dependent on future taxableincome, its ability to use foreign tax credit carryforwards and carrybacks, andthe effectiveness of its tax planning strategies in the various relevantjurisdictions. Changes to the Company’s income tax provision or in thevaluation of the deferred tax assets and liabilities may affect its annualeffective income tax rate.

**21.   ACCOUNTINGFOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:**

TheCompany uses derivative financial instruments to manage its exposures toforeign currency exchange rate changes. The derivative instruments areaccounted for pursuant to SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities”, as amended by SFAS No. 138, “Accountingfor Certain Derivative Instruments and Certain Hedging Activities”. As amended,SFAS No. 133 requires that an entity recognize all derivatives as eitherassets or liabilities on the balance sheet, measure those instruments at fairvalue and recognize changes in the fair value of derivatives in earnings in theperiod of change unless the derivative qualifies as an effective hedge thatoffsets certain exposures. Such contracts are designated at inception to therelated foreign currency exposures being hedged. Beginning in the first quarterof 2004, the Company hedges certain of its Japanese Yen-denominated balancesheet exposures against future movements in foreign currency exchange rates byusing foreign currency forward contracts. Hedged transactions are denominatedin U.S. dollars on behalf of these transactions denominated in Japanese Yen.Pursuant to its foreign currency exchange hedging policy, the Company may hedgeanticipated transactions and the related payables denominated in foreigncurrencies using forward foreign currency exchange rate contracts. Gains andlosses on these fair value hedges are intended to offset gains and losses fromthe revaluation of Japanese Yen-denominated recognized liabilities. The netresult of these gains and losses on contracts and revaluation included ininterest and 

21

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other income (expense) was insignificant for the threemonths ended March 31, 2004. The Company’s foreign currency forwardcontracts generally mature within three months. These derivative financialinstruments are not held for trading purposes. There were no foreign currencyforward contracts held at March 31, 2004.

**22.   RECENTACCOUNTING PRONOUNCEMENTS:**

In November 2003,the EITF issued EITF No. 03-6 “Participating Securities and the Two-Class Methodunder FASB Statement No. 128,” which provides for a two-class method ofcalculating earnings per share computations that relate to certain securitiesthat would be considered to be participating in conjunction with certain commonstock rights. This guidance would be applicable to the Company starting withthe second quarter beginning April 1, 2004. The Company is currently evaluatingthe potential impact of this pronouncement on its financial statements.

**23.   SUBSEQUENT EVENTS:**

On April 21, 2004, the Company entered into anagreement to purchase substantially all of the assets and assume certainliabilities of TELOS Technology, Inc. (“TELOS”) and its subsidiaries. Thetransaction includes an initial cash consideration of $29.0 million, with anadditional payment of up to $19.0 million based upon recognized revenue fromthe sale of TELOS products. TELOS is a provider of mobile switching productsand services for voice and data communication networks. Closing of thetransaction is subject to satisfaction or waiver of certain conditions outlinedin the purchase agreement. The transaction has been approved by the boards ofdirectors of both companies and by the stockholders of TELOS. Approval of theCompany’s stockholders is not required.

On April 27,2004, the Company completed the purchase of the assets, certain employees andcertain contracts related to Hyundai Syscomm Inc.’s (“HSI”) CDMA infrastructurebusiness for markets outside of Korea. In addition, the Company boughtsubstantially all of HSI’s registered intellectual property, which has beenlicensed back to HSI for its business in Korea. Subject to the attainment ofcertain milestones and the transfer of certain know-how, the totalconsideration for this transaction is approximately $14.3 million. There was$7.3 million in cash payable at the closing date and an additional $3.0 millionin cash payable one year from the closing date. In conjunction with thistransaction, the Company loaned HSI $3.2 million at an effective interest rateof 12% per annum, which was used by HSI to satisfy outstanding debtobligations. The principal amount of the loan is due in April 2005. TheCompany may set-off HSI’s payment obligations against the outstanding $3.0million of the purchase price. The remaining $4.0 million of the purchase priceis comprised of $2.0 million payable upon the transfer of manufacturingknow-how from HSI to our subsidiaries in China and $2.0 million payable uponthe completion of certain revenue milestones.

**24.   RESTATEMENTOF FINANCIAL STATEMENTS:**

As part of the financial closing process for the yearended December 31, 2004, the Company identified certain prior perioderrors resulting in a restatement which decreased the provision for incometaxes and increased net income by $20.7 million for the year ended December 31,2003. In addition, as a result of the correction of the tax provision, retainedearnings was increased by $20.7 million, additional paid-in capital wasincreased by $0.9 million, income taxes payable was decreased by $2.5 million,other long-term assets were increased by $21.6 million, prepaids were increasedby $2.8 million and other current assets were reduced by $5.3 million, all asof December 31, 2003. There was no net effect on cash provided fromoperating activities as a result of this error.

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Theimpact of the restatement on each of the respective quarters in 2003 is asfollows (in thousands):
| ** **                   | ** ** | **Decrease in Income  Tax Expense** | ** ** | **Decrease in Income  Tax Payable** | ** ** | **Increase in  Net Income** | ** ** | **Increase in  diluted EPS** | ** ** |
|------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------|------------|----------------------------------------|------------|
| For the three months  ended: |       |                                               |       |                                               |       |                                  |       |                                   |       |   |   |   |   |   |   |   |   |
| March 31,  2003         |       |                                               | $          | 3,825                                              |       |                                  |       | $                                      | 3,825      |   |   |   | $ | 3,825 |   |   |   | $ | 0.04 |   |   |
| June 30,  2003          |       |                                               | $          | 4,038                                              |       |                                  |       | $                                      | 4,038      |   |   |   | $ | 4,038 |   |   |   | $ | 0.03 |   |   |
| September 30, 2003      |       |                                               | $          | 6,064                                              |       |                                  |       | $                                      | 6,064      |   |   |   | $ | 6,064 |   |   |   | $ | 0.04 |   |   |

 

During the evaluation of the errors related to theincome tax provision, the Company determined that an additionalreclassification of reported 2003 results was required. Specifically, cost ofsales and other income both increased by $3.5 million for the year ended December 31,2003 to properly classify certain incentive payments received for exports andvalue-added taxes in China. This adjustment related solely to the fourthquarter of 2003.

In addition to the errors in the 2003 tax provision,the Company had not correctly identified a related party that is deemed avariable interest entity and for whom the Company is considered the primarybeneficiary in accordance with FASB Interpretation No. 46 (“FIN 46”). TheCompany has corrected its 2003 financial statements to reflect theconsolidation of this variable interest entity, MDC Holding Limited (“MDCHolding”) and its affiliated entities (MDC Holding and such affiliated entitiesare referred to, collectively, as “MDC”). At December 31, 2003, thisconsolidation resulted in a $5.5 million increase in total assets and a $0.7million increase in total liabilities. There was no effect on net income as aresult of this consolidation. The consolidation occurred upon the Company’sadoption of FIN 46 at the beginning of the fourth quarter of 2003.

Furthermore, an impairment charge of $7.4 million, netof taxes of $1.3 million, was recorded to reflect an impairment of MDCequipment subject to a revenue share arrangement. Due to the uncertaintiessurrounding the customer’s subscriber income and ability to pay under thisarrangement, the Company determined that an impairment charge should have beenrecorded in the fourth quarter of 2003 when these conditions should have beenidentified. Accordingly, an impairment charge of $7.4 million, net of tax, wasrecorded, which decreased both total assets and equity by $7.4 million at December 31,2003. This adjustment was recorded in the fourth quarter of 2003.

The Companyidentified certain revisions in classification during the preparation of the2003 restated financial statements. Therefore, for the consolidated financialstatements for the quarter ended March 31, 2004, the following adjustmentswere made to conform to the 2003 restated financial statements:

(1)         Cost of sales for relatedparty revenue transactions is presented separately from cost of sales fornon-related party revenue transactions for all periods presented;

(2)         Certain other long-termassets increased and intangible assets decreased by $1.6 million;

(3)         A related party which is31% owned by an individual related to a member of the Company’s Board ofDirectors and associated transactions have been identified. See Note 18 to theConsolidated Financial Statements.

On April 13, 2005, the Company filed Amendment No. 1to its Annual Report on Form 10-K/A for the year ended December 31,2003 to reflect the restatement of its consolidated financial statements forthe year then ended and to disclose the impact on quarters ended March 31,2003, June 30, 2003 and September 30, 2003.

The results of operations for the year ended December 31,2004 and the results of operations for each of the quarters ended March 31,2004, June 30, 2004 and September 30, 2004 have not been impacted bythe restatement of 2003 financial results discussed above. However, thebeginning and ending balances of 

23

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certain balance sheetaccounts for the quarters of 2004 were affected and therefore have beenadjusted in this Amendment No. 2 to reflect the 2003 restatement.

Thefollowing table shows the effect on the line items of the adjustments and otherrevisions in classification resulting from the 2003 restatement in thecomparative consolidated financial statements (in thousands, except per sharedata):
| ** **                                                                     | ** ** | **As Previously** | ** ** | **As**       | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------|------------|--------------|------------|
| ** **                                                                     | ** ** | **Reported**           | ** ** | **Restated** | ** ** |
| **Balance Sheets, as of  March 31, 2004:**                                |       |                   |       |         |       |
| Current assets:                                                                |       |                   |       |         |       |
| Cash and cash equivalents                                                      |       | $                      | 724,939    |         | $          | 728,712 |   |
| Accounts receivable, net of allowances for doutful  accounts                   |       | 402,677                |       | 403,044      |       |
| Inventories                                                                    |       | 318,079                |       | 318,106      |       |
| Deferred costs/Inventories at customer sites under  contract                   |       | 426,240                |       | 409,323      |       |
| Prepaids                                                                       |       | 114,669                |       | 117,510      |       |
| Other current assets                                                           |       | 54,628                 |       | 50,719       |       |
| Property, plant  and equipment, net                                            |       | 200,762                |       | 201,725      |       |
| Intangible  assets, net                                                        |       | 42,878                 |       | 41,256       |       |
| Other long-term  assets                                                        |       | 40,836                 |       | 72,405       |       |
| Current liabilities:                                                           |       |                   |       |         |       |
| Accounts payable                                                               |       | 288,017                |       | 287,963      |       |
| Income taxes payable                                                           |       | 26,397                 |       | 23,882       |       |
| Customer advances                                                              |       | 302,255                |       | 294,100      |       |
| Other current liabilities                                                      |       | 175,857                |       | 176,629      |       |
| Long-term debt                                                                 |       | 402,500                |       | 410,655      |       |
| Minority interest  in consolidated subsidiaries                                |       | 610                    |       | 5,359        |       |
| Stockholders’ equity:                                                     |       |                   |       |         |       |
| Additional paid-in capital                                                     |       | 1,115,113              |       | 1,115,972    |       |
| Retained earnings                                                              |       | 231,326                |       | 244,607      |       |
| **Statements  of Cash Flows, for the three months ended March 31, 2004:** |       |                   |       |         |       |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF PERIOD                              |       | 373,974                |       | 377,747      |       |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD                                    |       | 724,939                |       | 728,712      |       |
| **Statements  of Operations, for the three months ended March 31, 2003:** |       |                   |       |         |       |
| Income tax  expense                                                            |       | 12,447                 |       | 8,622        |       |
| Net income                                                                     |       | 37,343                 |       | 41,168       |       |
| Earnings per share                                                             |       |                   |       |         |       |
| Basic                                                                          |       | 0.35                   |       | 0.38         |       |
| Diluted                                                                        |       | 0.33                   |       | 0.37         |       |
| **Statements  of Cash Flows, for the three months ended March 31, 2003:** |       |                   |       |         |       |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                         |       |                   |       |         |       |
| Net income                                                                     |       | 37,343                 |       | 41,168       |       |
| Adjustments to reconcile  net income to net cash used in operating activities: |       |                   |       |         |       |
| Changes in  operating assets and liabilities:                                  |       |                   |       |         |       |
| Income taxes  payable                                                          |       | 5,922                  |       | 2,097        |       |
|                                                                                |            |                        |            |              |            |  |  |

 

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**ITEM2—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

**FORWARD-LOOKING STATEMENTS**

This Report on Form 10-Qcontains forward-looking statements within the meaning of the federalsecurities laws. These statements are based on information that is currentlyavailable to management. We intend such forward-looking statements to becovered by the safe harbor provisions of the Private Securities LitigationReform Act of 1995, and we are including this statement for purposes ofcomplying with those provisions. The forward-looking statements include,without limitation, those concerning the following: our expectations as to thenature of possible trends, including our expectations about continuing growthin the number of subscribers for telecommunications products in China; ourexpectations regarding continued growth in our business and operations; ourexpectation that there will be fluctuations in our overall gross profit, grossmargin, product mix, quarter to quarter results, customer base and sellingprices; our plans for expanding the direct sales organization and our sellingand marketing campaigns and activities; our expectation that we may use ourcash, debt or securities to acquire or invest in complementary businesses, technologiesor product offerings; our expectation that there will be increases in selling,marketing, research and development, and general and administrative expenses;our expectations regarding future growth of our business and operations; ourexpectation that we will continue to invest significantly in research anddevelopment; our expectations regarding the status of products underdevelopment; our expectations regarding our future investments; ourexpectations regarding our future levels of cash and cash equivalents, as wellas our expectation that existing cash and cash equivalents will be sufficientto finance our operations for the foreseeable future; our expectationsregarding licensing requirements and our ability to receive licenses in Chinafor our PAS system and other products; our expectations regarding thedevelopment of a 3G network in China; our expectations regarding the impact ofa reorganization of China Netcom; our expectation that our business willcontinue to be significantly influenced by the political, economic and legalenvironment in China, as well as expectations about the nature of political,economic and legal reform in China; our expectations regarding the futureallocation of net sales by product group; our expectations regardingefficiencies we hope to achieve in supply chain and inventory purchasing, aswell as trends in inventory growth; and our expectations regarding ourexpansion into new markets around the world. Additional forward-lookingstatements may be identified by the words, “anticipate,” “expect,” “believe,” “intend,”“will” and similar expressions, as they relate to us or our management.Investors are cautioned that these forward-looking statements are inherentlyuncertain. These statements are subject to risks and uncertainties that maycause actual results and events to differ materially. For a detailed discussionof these risks and uncertainties, see the “Factors Affecting Future OperatingResults” section of this Form 10-Q. We do not guarantee futureresults and undertake no obligation to update the forward-looking statements toreflect events or circumstances occurring after the date of this Form 10-Q.

**RESTATEMENT**

The following Management’sDiscussion and Analysis of Financial Condition and Results of Operations,presented in comparative format, gives effect to the 2003 restatement discussedin Note 24 to the consolidated financial statements included in Item I.

**EXECUTIVE SUMMARY**

We design, manufacture and sell telecommunicationsequipment and products and provide services associated with their operation.Our products are deployed and installed exclusively by telecommunicationswireless and wireline service providers. We provide an extensive range ofproducts for transportation of voice, data and video traffic for serviceproviders around the world. Our business is conducted globally in China, Japan,India, the Central and Latin American region, North America, the 

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European, Middle Easternand African region and southeastern and northern Asia. Our objective is to be aleading global provider of Internet Protocol (“IP”) networking products andservices. We differentiate ourselves with products designed, developed andcommercialized to reduce network complexity, integrate high performancecapabilities and that allow a simple transition to next generation networks.This results in deployment, maintenance and upgrades that are both economicaland efficient, allowing operators to earn a high return on their investment.

Our technologiesand products fall into three major categories:

·       wireless,a technology that enables end users, or subscribers, to send and receive voiceand data while mobile and using wireless devices; 

·       wireline,a technology that satisfies customer demand for high-speed, cost effectivedata, voice and media transport and carriage; and 

·       switching,a diverse assembly of software and hardware based networking elements designedto replace central office telephone switches.

Our products within each of these categories includemultiple hardware and software subsystems that can be offered in variouscombinations to suit individual subscriber needs. Our system technologies andproducts are based on widely adopted global communications standards and aredesigned to allow service providers to quickly and cost-efficiently integrateour systems into their existing networks and deploy our systems in newbroadband, Internet Protocol (“IP”) and wireless network rollouts. Our systemtechnologies are also designed to allow timely and cost efficient transition tofuture next-generation network technologies, enabling our service providercustomers to protect their initial infrastructure investments.

Historically, substantially all of our sales have beento service providers in China. 92% of our sales for the three months ended March 31,2004 were derived from China. However, we are currently expanding our salesefforts to include other communications markets such as in the Central andLatin American region, the European, Middle Eastern and African region, NorthAmerica and southeastern and northern Asia. We intend to penetrate thesemarkets through direct sales offices located in key market regions, bylicensing our technology to local manufacturers where import taxation isfavorable, by developing local sales agency and distributor relationshipswithin specific market regions, and by establishing sales relationships withoriginal equipment manufacturers. Our sales division began establishingregional offices and local direct sales representative offices to providesupport for our expanding global sales operations.

In a telecommunications industry that has experienceda period of contraction over the last few years, we have experiencedsignificant growth in revenue. For the three months ended March 31, 2004,we had $622.3 million of revenue, an 88% increase over the corresponding periodin 2003. This growth in revenue was driven by China’s growingtelecommunications market. China, which we believe to be one of the fastestgrowing telecommunications markets in the world, continued to experienceincreasing fixed-line and mobile telephone and Internet subscriber growth, from480.1 million subscribers in 2002 to 611.5 million subscribers in2003, according to China’s Ministry of Information Industry. We believe thissubscriber growth led to increased demand for our PAS services and handsetsduring the first quarter of fiscal year 2004. We use subscriber growthstatistics to gauge future inventory purchasing requirements as well as toforecast our anticipated revenue growth. We expect this subscriber growth trendto continue throughout 2004 as China’s teledensity rates remain low incomparison to that of developed countries.

The number of competitors for communications accessand switching systems and handsets in China has grown in line with China’sgrowing telecommunications market. This growth has led to competitive pricingpressure, causing our average selling prices to decrease during the threemonths ended March 31, 2004 relative to those in the comparativeperiod in 2003. This pricing pressure affected both our infrastructure andhandset product lines, contributing to decreased margins overall. We strive todevelop 

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products with moreadvanced features and to enhance the features of our existing products, whichwe believe will enable us to offer our customers a more advanced product at ahigher average selling price than otherwise would be possible when the productsare ready for sale. In addition, during the first quarter of 2004, we continuedto strive to reduce the cost of manufacturing our products by streamlining ourdesign functions.

Historically and in thecurrent period, slower business activity attributable to typical winterseasonality and the Chinese New Year affected our operating results for thefirst quarter of the fiscal year. Cash used in operations was $27.3 million forthe three months ended March 31, 2004. This compares favorably to the$74.8 million of operating cash consumed in the first quarter of 2003, and weexpect positive cash flows from operations for the full fiscal year 2004. In aneffort to penetrate new markets around the world, support our growing businessand expand our product offerings, we continued to invest resources in ourselling, administrative and research and development groups. While these operatingcosts have increased significantly in line with increasing sales, we havedecreased operating costs as a percentage of revenues to 19% for the threemonths ended March 31, 2004 from 20% for the three months ended March 31,2003.

***KEY TRANSACTIONS***

***Stockholders’ Equity***

On January 14, 2004, we sold 12.1 millionshares of common stock at $39.25 per share in a privately negotiatedtransaction with an institution, for net proceeds of approximately$474.6 million. The net proceeds are intended to fund strategic andgeneral corporate activities, including, but not limited to, acquisitions,investments or capital expenditures.

On March 12, 2004, weannounced a stock repurchase program, authorizing the repurchase of up to5,000,000 shares of our outstanding stock over a period of 6 months. The Boardapproved an additional repurchase of 1,623,000 shares in a privately negotiatedtransaction with an institution. We repurchased a total of approximately 2.6million shares at an average price of $30.43 per share, for a total cashoutflow of $78.2 million. The authorized repurchase period will expire in thethird quarter of this fiscal year.

***Transactions with Softbank and Affiliated Entities***

*Softbank*

We recognized revenue of $11.6 million and $58.5million for the three months ended March 31, 2004 and 2003, respectively,with respect to sales of telecommunications equipment to Softbank BBCorporation (“SBBC”), an affiliate of SOFTBANK CORP. and SOFTBANKAmerica Inc., a significant stockholder of ours. SBBC offers asynchronousdigital subscriber line (“ADSL”) coverage throughout Japan, which is marketedunder the name “YAHOO BB!”. The majority of the products we provide to SBBC isassociated with ADSL technology. The contract was competitively bid and theterms of this contract were on terms no more favorable than those withunrelated parties. Included in accounts receivable at March 31, 2004 and December 31,2003 were $29.8 million and $43.9 million, respectively, related to thisagreement. There were no amounts included in deferred revenue in respect tothis agreement at March 31, 2004 and December 31, 2003.

During 2000, we invested $10.0 million inSoftbank China, an investment fund established by SOFTBANK CORP. focused oninvestments in Internet companies in China. This investment permits us toparticipate in the anticipated growth of Internet-related businesses in China.Our investment constitutes 10% of the funding for Softbank China, with SOFTBANKCORP. contributing the remaining 90%. The fund has a separate management team,and none of our employees are employed by the fund. Many of the fund’sinvestments are and will be in privately held companies, many of which arestill in the start-up or development stages. These investments are inherentlyrisky as the market for the technologies or products 

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the companies have underdevelopment are typically in the early stages and may never materialize. Weaccount for this investment under the cost method and recorded insignificantlosses and losses of $0.1 million due to an other-than-temporary declinein the carrying value of this investment for both the three months ended March 31,2004 and 2003. The balance in this investment was $5.3 million at March 31,2004.

During the first quarter of fiscal 2002, we invested$2.0 million in Restructuring Fund No. 1, a venture capitalinvestment limited partnership established by SOFTBANK INVESTMENT CORP., anaffiliate of SOFTBANK CORP. The fund focuses on leveraged buyout investments incompanies in Asia undergoing restructuring or bankruptcy proceedings. The totalfund offering is expected to be between approximately $150.0 million and$226.0 million, with each investor contributing a minimum of$0.8 million. The fund has a separate management team, and none of ouremployees are employed by the fund. We account for this investment under theequity method of accounting. During the three months ended March 31, 2004,we recorded insignificant equity losses and recorded no losses for thecorresponding period in 2003. The balance in this investment was$1.8 million at March 31, 2004.

On April 5, 2003, werepurchased 8.0 million shares of our common stock beneficially owned bySOFTBANK America Inc., at a purchase price of $17.385 per share. The totalcost of the repurchase was $139.6 million including transaction fees. Inconnection with this repurchase transaction, SOFTBANK America Inc. enteredinto an agreement with us not to offer, sell or otherwise dispose of our commonstock for a period of one year, subject to a number of exceptions. As of March 31,2004, SOFTBANK America Inc. beneficially owned approximately 12.8 % of ouroutstanding stock.

*Starcom Products, Inc.*

We obtain engineeringconsulting and employee placement services from Starcom Products, Inc. (“Starcom”),which is 31% owned by an individual related to a member of our Board ofDirectors. We paid $0.2 million and $0.2 million for the three months ended March 31,2004 and 2003, respectively, for engineering consulting and employee placementservices from Starcom.

***Subsequent Events***

On April 21, 2004, we entered into an agreementto purchase substantially all of the assets and assume certain liabilities ofTELOS Technology, Inc. (“TELOS”) and its subsidiaries. The transactionincludes an initial cash consideration of $29.0 million, with an additionalpayment of up to $19.0 million based upon recognized revenue from the sale ofTELOS products. TELOS is a provider of mobile switching products and servicesfor voice and data communication networks. Closing of the transaction issubject to satisfaction or waiver of certain conditions outlined in thepurchase agreement. The transaction has been approved by the boards ofdirectors of both companies and by the stockholders of TELOS. Approval of ourstockholders is not required.

On April 27, 2004, wecompleted the purchase of the assets, certain employees and certain contractsrelated to Hyundai Syscomm Inc.’s (“HSI”) CDMA infrastructure business formarkets outside of Korea. In addition, we bought substantially all of HSI’sregistered intellectual property, which has been licensed back to HSI for itsbusiness in Korea. Subject to the attainment of certain milestones and thetransfer of certain know-how, the total consideration for this transaction isapproximately $14.3 million. There was $7.3 million in cash payable at theclosing date and an additional $3.0 million in cash payable one year from theclosing date. In conjunction with this transaction, we loaned HSI $3.2 millionat an effective interest rate of 12% per annum, which was used by HSI tosatisfy outstanding debt obligations. The principal amount of the loan is duein April 2005. We may set-off HSI’s payment obligations against theoutstanding $3.0 million of the purchase price. The remaining $4.0 million ofthe purchase price is 

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comprisedof $2.0 million payable upon the transfer of manufacturing know-how from HSI toour subsidiaries in China and $2.0 million payable upon the completion ofcertain revenue milestones.

**RESULTS OF OPERATIONS**

Approximately 92% and 81% of our net sales for thethree months ended March 31, 2004 and 2003, respectively, were in China.Accordingly, our business, financial condition and results of operations arelikely to be influenced by the political, economic and legal environment inChina, and by the general state of China’s economy for the foreseeable future.Our results may be adversely affected by, among other things, changes in thepolitical, economic, competitive and social conditions in China, includingchanges in governmental policies with respect to laws and regulations, changesin the telecommunications industry and regulatory rules and policies,anti-inflationary measures, currency conversion and remittance abroad, andrates and methods of taxation. We extend credit to our customers in Chinawithout requiring collateral. We monitor our exposure for credit losses andmaintain allowances for doubtful accounts. Business activity in China and manyother countries in Asia declines considerably during the first quarter of eachyear in observance of the Lunar New Year. As a result, we have lower salesactivity during the first quarter of our fiscal year relative to historical andexpected year-long trends, and we expect this trend to continue.

Cost of sales consists primarily of material costs,payments to agents, costs associated with manufacturing, assembly and testingof products, costs associated with installation and customer training andoverhead and warranty costs. Cost of sales also includes import taxes andtariffs on components and assemblies. Some components and materials used in ourproducts are purchased from a single supplier or a limited group of suppliersand, in some cases, are subject to our obtaining Chinese import permits andapprovals. We also rely on third party manufacturers in China to manufactureand assemble most of our handsets. Our cost of sales was also impacted by thefact that a significant portion of our inventory component purchases wasdenominated in Japanese Yen. Although the dollar strengthened against the Yenin the current period, the cost of inventory included in our cost of sales isbased on exchange rates from approximately four to six months ago due to ourusing the exchange rates on the date the inventory was received to calculateinventory cost.

Our gross profit has been affected by product mix,average selling prices and material costs. Our gross profit, as a percentage ofnet sales, varies among our product families. We expect that our overall grossprofit, as a percentage of net sales, will fluctuate from period to period as aresult of shifts in product mix, anticipated decreases in average sellingprices and our ability to reduce cost of sales.

Selling, general and administrative expenses includecompensation and benefits, professional fees, sales commissions, provision fordoubtful accounts receivable and travel and entertainment costs. A largepercentage of our costs are fixed and are difficult to quickly reduce inperiods of reduced sales. We intend to pursue aggressive selling and marketingcampaigns and to expand our direct sales organization, and, as a result, oursales and marketing expenses will increase in absolute dollars in futureperiods. We also expect that in support of our continued growth, general andadministrative expenses will continue to increase in absolute dollars for theforeseeable future.

Research and developmentexpenses consist primarily of salaries and related costs of employees engagedin research, design and development activities, the cost of parts forprototypes, equipment depreciation and third party development expenses. Alarge percentage of our costs is fixed and difficult to quickly reduce inperiods of reduced sales. Our research and development efforts are focused ondeveloping both future, next-generation products as well as working to upgradeour existing systems and products. We believe that continued investment inresearch and development is critical to our long-term success. Accordingly, weexpect that our research and development expenses will increase in absolutedollars in future periods.

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**THREEMONTHS ENDED MARCH 31, 2004 AND MARCH 31, 2003**

**NET SALES**
| ** **                   | ** ** | **Three months ended March 31,** | ** ** |
|------------------------------|------------|------------------------------------------------------|------------|
| ** **                   | ** ** | **2004**                                             | ** ** | ** ** | ** ** | **2003** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **(in thousands)**                              | ** ** |
| ***Sales  by region***       |       |                                                 |       |   |   |   |   |   |   |
| China                        |       | $                                                    | 570,566    |   | 92 | % | $ | 268,929 |   | 81 | % |
| Japan                        |       | 19,427                                               |       | 3 | % | 59,821 |   | 18 | % |
| Other                        |       | 32,299                                               |       | 5 | % | 1,770 |   | 1 | % |
| **TOTAL  NET SALES**         |       | $                                                    | 622,292    |   | 100 | % | $ | 330,520 |   | 100 | % |
| ***Sales  by product line*** |       |                                                 |       |   |   |   |   |   |   |
| Wireless  infrastructure     |       | $                                                    | 336,517    |   | 54 | % | $ | 124,360 |   | 38 | % |
| Subscriber  handsets         |       | 236,420                                              |       | 38 | % | 139,959 |   | 42 | % |
| Wireline products            |       | 49,355                                               |       | 8 | % | 66,201 |   | 20 | % |
| **TOTAL NET SALES**          |       | $                                                    | 622,292    |   | 100 | % | $ | 330,520 |   | 100 | % |

 

This increase in sales was primarily attributable toincreased demand for our products and services and the continued strength ofour sales in China and globally. Net sales growth was primarily due to anincrease in subscribers, requiring telecommunication providers to expand theirtelecommunication infrastructures. This changed our sales mix, and a greaterpercentage of wireless infrastructure products were sold during the threemonths ended March 31, 2004 than in the comparative period in 2003.

The decrease in wireline sales is attributable toseveral factors. Primarily, this decrease is due to China’s evolution fromwireline to wireless technology. As China evolves into using wireless technologyfor its telecommunications needs, our sales of wireline products havedecreased. Additionally, sales of wireline products were atypically high forthe three months ended March 31, 2003 due to Japan’s expansion of itswireline infrastructure base in that period. 100% of sales to Japan werewireline product sales for the three months ended March 31, 2003 ascompared to approximately 60% for the three months ended March 31, 2004.

In addition to increasing the amount of infrastructuresales, this increase in subscribers also led to an increase in customer demandfor handsets in the first quarter 2004 as compared to the first quarter 2003,contributing to the increase in absolute dollars of handset sales.

We group all of our China customers together byprovince and treat each province as one customer since that is the level atwhich purchasing decisions are made. At March 31, 2004 and 2003, we had 31such customers. The Guangdong province accounted for 24% of our net sales forthe three months ended March 31, 2004. The Hei Long Jiang provinceaccounted for 14% of our net sales for the three months ended March 31,2003. We expect our sales to grow at a moderate rate through 2004, with ourglobal sales growing at a higher rate than our China sales. Our handset salesincreased as a result of increased total PAS subscribers, from approximately17.1 million subscribers at March 31, 2003 to approximately46.9 million subscribers at March 31, 2004, and we expect this growthrate to continue throughout the remainder of 2004.

We expect that 2004 netsales will be comprised of approximately 45% to 55% wireless infrastructuresales, approximately 35% to 45% subscriber handset sales and approximately 10%to 20% wireline products.

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**GROSS PROFIT**
| ** **              | ** ** | **Three months ended  March 31,** | ** ** |
|-------------------------|------------|--------------------------------------------------|------------|
| ** **              | ** ** | **2004**                                         | ** ** | **2003** | ** ** |
| ** **              | ** ** | **(in thousands)**                          | ** ** |
| Gross profit            |       | $                                                | 176,034    |   | $ | 112,685 |   |
| Gross profit percentage |       | 28                                               | %          | 34 | % |
|                         |            |                                                  |            |  |  |  |  |

 

Our gross profit varies across our different productlines and is affected by product mix, average selling prices and the cost ofmaterials. The decrease in gross profit as a percent of net sales for the threemonths ended March 31, 2004 from the corresponding period in 2003 was inpart attributable to decreased sales of our higher margin wireline products. Ourgross profit also decreased during the three months ended March 31, 2004due to higher cost of sales from inventory component purchases denominated inJapanese Yen as a result of the appreciation of the Yen versus the dollarduring the months in which this inventory was received. Finally, the decline ingross profit resulted from increased competitive market pricing pressures onour products, a result of continued pricing pressures throughout thetelecommunications market in the first quarter of 2004.

We believe that ouroverall gross profit as a percentage of net sales will continue to fluctuatefrom period to period as a result of shifts in product mix, anticipateddecreases in average selling prices and our ability to reduce cost of sales. Weexpect that there will be continued competitive market pricing pressures on ourproducts in line with current trends in the industry. We expect thatfluctuations in the value of Japanese Yen will continue to affect our cost ofgoods sold and our gross profit.

**OPERATING EXPENSES**

Thefollowing table summarizes our operating expenses:
| ** **                                                           | ** ** | **Three months ended March 31,** | ** **  |
|----------------------------------------------------------------------|------------|------------------------------------------------------|-------------|
| ** **                                                           | ** ** | ** **                                           | ** **  | **% of net** | ** ** | ** ** | ** ** | **% of net** | ** ** |
| ** **                                                           | ** ** | **2004**                                             | ** **  | **sales** | ** ** | **2003** | ** ** | **sales** | ** ** |
| ** **                                                           | ** ** | **(in thousands)**                              | ** **  |
| Selling, general  and administrative (“SG&A”) expenses |       | $                                                    | 66,943      |   |   | 11 | % |   | $ | 37,583 |   |   | 11 | % |   |
| Reasearch and  development (“R&D”)                     |       | 45,658                                               |        |   | 7 | % |   | 26,812 |   |   | 8 | % |   |
| In-process  research and development (“IPR&D”)         |       | —                                               |        |   | 0 | % |   | 1,320 |   |   | 0 | % |   |
| Amortization of  intangible assets                                   |       | 2,973                                                |        |   | 1 | % |   | 695 |   |   | 1 | % |   |
| **TOTAL OPERATING EXPENSES**                                         | ** ** | **$**                                                | **115,574** | ** ** | ** ** | **19** | **%** | ** ** | **$** | **66,410** | ** ** | ** ** | **20** | **%** |   |

 

*Selling, generaland administrative*

The increase in absolute dollars in selling, generaland administrative expenses is due to the hiring of additional personnel tosupport our increased business activities both in China and globally. Selling,general and administrative headcount increased to 2,679 employees at March 31,2004 as compared to 1,810 employees at March 31, 2003, causing theincrease in absolute dollars. The new personnel will help support our expandingglobal business outside of China.

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*Research anddevelopment*

The increase in absolutedollars of research and development expenses was primarily due to hiringadditional technical personnel to support our increased business levels.Research and development headcount increased to 2,342 employees at March 31,2004 as compared to 1,440 employees at March 31, 2003. The decrease ofresearch and development expenses as a percentage of net sales was due toincreased economies of scale associated with increased business levels. Themajority of the new personnel being hired in China, where labor costs are lessexpensive than in the United States, also contributed to the decrease inresearch and development expenses as a percentage of net sales.

*In-process researchand development costs*

There was no charge toIPR&D for the three months ended March 31, 2004. The $1.3 millioncharge for the three months ended March 31, 2003 arose from ouracquisition of Shanghai Yi Yun and was based on an independent valuation.

*Amortization ofintangible assets*

The increase in theamortization of intangible assets for the three months ended March 31,2004 is due to an additional $44.9 million of intangibles recorded upon ouracquisition of CommWorks in May 2003. The estimated useful lives of thesepurchased intangibles are from one to ten years. Estimated amortization expensefor the next five years, beginning with the year ended December 31, 2005is $7.7 million, $5.9 million, $5.6 million, $4.0 million and $2.8 million.

**OTHER INCOME (EXPENSES)**

*Interest income*

Interest income was $1.4million and $0.9 million for the three months ended March 31, 2004 and2003, respectively. The increase in interest income was due to higher averagecash balances for the three months ended March 31, 2004 as compared to thecorresponding period in 2003.

*Interest expense*

Interest expense was $1.1million and $0.6 million for the three months ended March 31, 2004 and2003, respectively. The increase in interest expense was primarily due tointerest expense and amortization of debt issuance costs relating to $402.5million of convertible subordinated notes that we issued in March 2003.

*Other income(expense), net*

Net other income was $8.8million and $4.2 million for the three months ended March 31, 2004 and2003, respectively. Net other income for the three months ended March 31,2004 was primarily due to our receiving a $7.8 million financial subsidy fromthe local Chinese government. This subsidy is to encourage our investment inlocal research and development and manufacturing activities. We also recorded aJapanese consumption tax refund of $1.4 million, offset by a $0.4 millionforeign exchange loss. Net other income for the three months ended March 31,2003 was primarily due to a reinvestment incentive payment received in China of$3.9 million.

*Equity in net lossof affiliated companies*

Equity in net loss ofaffiliated companies was $1.0 million for both of the three months ended March 31,2004 and 2003, respectively and primarily resulted from losses incurred at ourjoint venture with Matsushita Communication Industrial Co., Ltd., andMatsushita Electric Industrial Co., Ltd.

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*Income tax expense*

Income tax expense for the three months ended March 31,2003 was previously reported as $12.4 million and has been restated to $8.6million, a decrease of $3.8 million. The decrease in tax expense is due to thecorrection of the 2003 effective tax rate from 25% to 17%. See Note 24 to theconsolidated financial statements.

Income tax expense was$13.7 million and $8.6 million for the three months ended March 31, 2004and 2003, respectively. The primary reason for the increase in income taxexpense was that our income before taxes increased 38% for the three monthsended March 31, 2004 from the corresponding period in 2003. Consistentwith the increase in income tax expense, the overall effective tax rateincreased to 20% for 2004 as compared with 17% in 2003. This increase resultedfrom a greater proportion of income being derived in countries with higher taxrates.

**LIQUIDITY AND CAPITAL RESOURCES**

*Operating Activities*

*2004*

Net cash used in operatingactivities for the three months ended March 31, 2004 was $27.3 million.Operating cash was affected by changes in accounts receivable, inventory andcustomer advances offset by changes in deferred costs and accounts payable. Thelower level of business activity resulting from typical winter seasonality andfrom the Chinese New Year impacted our operating cash for the first quarter of2004, consistent with comparative periods in prior years. The $69.9 millionincrease in accounts receivable was, in part, attributable to lower cashcollections due to the Chinese New Year and the resulting decreased activitylevel. Inventory increased by $70.5 million, also decreasing our operating cash.As we expect sales to increase in subsequent quarters, we built our inventorysupply in this period to meet the anticipated demand in future periods. The$156.4 million decrease in customer advances also decreased operating cash forthe period. Customer advances, which represent cash deposits we have receivedfrom our customers for orders that have not yet received final acceptance,decreased due to an increased amount of customer acceptances. Offsetting theactivity that decreased operating cash for the period were changes in deferredcosts and accounts payable. Deferred costs, or inventory at customer sitesawaiting final acceptance, decreased by $132.7 million. The decrease indeferred costs was also a result of increased revenues and a greater number ofcustomer acceptances, corresponding to the decrease in customer advances. Accountspayable increased by $36.8 million, due to increased inventory purchasing.

*2003*

Net cash used inoperations for the three months ended March 31, 2003 of $74.8 million wasprimarily due to an increase in inventory, deferred costs, accounts receivableand other current and non-current assets of $131.1 million, $241.2 million,$41.4 million and $52.1 million, respectively. This was partially offset by netincome of $41.2 million, adjusted for non-cash charges including depreciationand amortization expense of $7.9 million and allowance for doubtful accounts of$8.2 million, as well as growth in accounts payable of $219.9 million, otheraccrued liabilities of $12.2 million, customer advances of $87.2 million, deferredrevenue of $5.7 million and income taxes payable of $2.1 million.

*InvestingActivities*

*2004*

Net cash used in investingactivities for the three months ended March 31, 2004 of $28.0 million wasprimarily due to purchases of property, plant and equipment to support ourexpansion. $12.4 million of the total $27.7 million in property, plant andequipment purchases were construction costs incurred on our 

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Hangzhoumanufacturing facility. Additional investing activities include an additional$1.0 million investment in Fiberxon, offset by net proceeds from the sale ofshort-term investments of $0.9 million.

*2003*

Net cash provided byinvesting activities for the three months ended March 31, 2003 of $53.6million was primarily due to net sales of short-term investments of $75.6million offset by purchases of property, plant and equipment of $15.2 million.

*FinancingActivities*

*2004*

Net cash provided byfinancing activities was $405.6 million for the three months ended March 31,2004. This was primarily due to proceeds raised from our selling 12.1 millionshares of common stock at $39.25 per share to Banc of America Securities,LLC, for net proceeds of approximately $474.6 million. In addition to the saleof stock, we received $9.2 million for the issuance of common stock throughstock option exercises. Offsetting cash provided by operating activities, weused a portion of the capital raised to repurchase a total of 2.6 millionshares of our common stock at an average price of $30.43 per share for a totalcost of $78.2 million, including transaction fees.

*2003*

Net cash provided byfinancing activities for the three months ended March 31, 2003 of $351.7million was primarily due to the offering of convertible subordinated notes of$391.4 million and proceeds from the exercise of stock options of $4.0 million,offset by purchases of call options for $43.8 million.

*Liquidity*

Our working capital was $1.3 billion and$961.7 million at March 31, 2004 and 2003, respectively. Thisincrease in working capital is due to increased cash on hand, to$728.7 million in cash and cash equivalents and $41.3 of short-terminvestments at March 31, 2004, from $562.1 million of cash and cashequivalents and $42.0 million of short-term investments at March 31,2003. Our working capital also increased due to larger accounts receivable,notes receivable and prepaids, lower accounts payable and deferred revenuewhich were partially offset by increased customer advances. Cash on handincreased due to $474.6 million of net proceeds received from our equityoffering in January 2004. This cash positions us to take advantage ofstrategic investment opportunities.

Our China sales are generally denominated in localcurrency. Due to the limitations on converting Renminbi, we are limited in ourability to engage in foreign currency hedging activities in China. Salesoutside China are generally denominated in US dollars. We cannot guarantee thatfluctuations in foreign currency exchange rates in the future will not have amaterial adverse effect on revenues from international sales and,correspondingly, on our business, financial condition and results ofoperations. We have contracts negotiated in Japanese Yen and we maintain a bankaccount in Japanese Yen for purchasing portions of our inventories and supplies.The balance of this Japanese Yen account at March 31, 2004 wasapproximately $43.1 million. Beginning in the first quarter of 2004, wehedge certain Japanese Yen-denominated balance sheet exposures against futuremovements in foreign currency exchange rates by using foreign currency forwardcontracts. Gains and losses on these fair value hedges are intended to offsetgains and losses from the revaluation of our Japanese Yen-denominatedrecognized liabilities. In accordance with Statement of Financial AccountingStandards No. 133 (“SFAS 133”), “Accounting for Derivative Instruments andHedging Activities,” we recognize derivative instruments and hedging activitiesas either assets or liabilities on the balance sheet and measure them at fairvalue. The net result of gains and losses on contracts and revaluation includedin interest and other income (expense) was 

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insignificant for thethree months ended March 31, 2004. Our foreign currency forward contractsgenerally mature within three months. We do not intend to utilize derivativefinancial instruments for trading purposes. There were no foreign currencyforward contracts held at March 31, 2004.

We believe that ourexisting cash and cash equivalents, short-term investments and cash fromoperations will be sufficient to finance our operations through at least thenext 12 months. As of March 31, 2004, we had cash, restricted cashand short-term investments, of $800.9 million and lines of credit totaling $390.5million available for future borrowings. $336.2 million of these expire in 2004and $54.3 million of these facilities expire between 2005 and 2010. However, inthe event that our current cash balances, future cash flows from operations andcurrent lines of credit are not sufficient to meet our obligations or strategicneeds or in the event that market conditions are favorable, we would considerraising additional funds in the capital or equity markets. If additionalfinancing is needed, there can be no assurance that such financing will beavailable to us on commercially reasonable terms, or at all.

*Income taxes*

Our subsidiaries and joint ventures located in Chinaenjoy tax benefits which are generally available to foreign investmententerprises, including full exemption from national enterprise income tax fortwo years starting from the first profit making year and/or a 50% reduction innational income tax rate for the following three years. In addition, localenterprise income tax is often waived or reduced during this taxholiday/incentive period. Under current regulations in China, foreigninvestment enterprises that have been accredited as technologically advancedenterprises are entitled to additional tax incentives. These tax incentivesvary in different locales and could include preferential national enterpriseincome tax treatment at 50% of the usual rates for different periods of time.The tax holidays discussed above are applicable to UTStarcom (Chongqing) Co.,Ltd. (“CUTS”), UTStarcom Telecom Co., Ltd. (“HUTS”), Hangzhou UTStarcom TelecomCo., Ltd. (“HSTC”) and UTStarcom China Co., Ltd. (“UTSC”), our activesubsidiaries in China, as those entities qualify as accredited technologicallyadvanced enterprises. Specifically, HUTS currently enjoys a 15% tax rate thatwill continue indefinitely provided they remain as a technologically advancedenterprise and the Government does not change the tax laws. UTSC currentlyenjoys a 10% holiday tax rate that expires on December 31, 2005. HSTC andCUTS are currently exempt from income tax until December 31, 2004, atwhich point they will be subject to a 7.5% tax rate, which will expire on December 31,2007.

We are working toimplement a research and development cost sharing arrangement among our keyworldwide entities. The purpose of cost sharing is to enable its participantsto jointly develop and own intangibles. Under research and development costsharing, the total research and development expense is paid by cost-sharingparticipants in proportion to each participant’s future sales. The benefit isthat there is greater certainty with respect to transfer pricing and definedownership of IP. Cost sharing in China is a new concept and we are workingclosely with the China Tax and Regulatory Authorities to gain approval for costsharing.

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*Contractualobligations and other commercial commitments*

Ourobligations under contractual obligations and commercial commitments are asfollows:
| ** **                      | ** ** | **March 31, 2004**              | ** ** |
|---------------------------------|------------|-------------------------------------------|------------|
| ** **                      | ** ** | **Payments Due by Period** | ** ** |
| ** **                      | ** ** | ** **                                | ** ** | **Less than** | ** ** | ** ** | ** ** | ** ** | ** ** | **More** | ** ** |
| ** **                      | ** ** | **Total**                                 | ** ** | **1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **than 5 years** | ** ** |
| ** **                      | ** ** | **(As Restated)(1)**                 | ** ** | ** ** | ** ** | **(As Restated)(1)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | **(in thousands)**                   | ** ** |
| *Contractual Obligations*       |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Notes Payable                   |       |                                      | $          | 1,044 |   |   | $ | 1,044 |   |   | $ | — |   |   | $ | — |   |   | $ | — |   |   |
| Convertible  Subordinated Notes |       |                                      | $          | 402,500 |   |   | $ | — |   |   | $ | — |   |   | $ | 402,500 |   |   | $ | — |   |   |
| Bank Loan                       |       |                                      | $          | 8,155 |   |   | $ | — |   |   | $ | 8,155 |   |   | $ | — |   |   | $ | — |   |   |
| Operating leases                |       |                                      | $          | 24,104 |   |   | $ | 10,183 |   |   | $ | 13,849 |   |   | $ | 432 |   |   | $ | — |   |   |
| *Other Commercial Commitments*  |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Standby letters  of credit      |       |                                      | $          | 26,863 |   |   | $ | 26,863 |   |   | $ | — |   |   | $ | — |   |   | $ | — |   |   |
| Purchase  commitments           |       |                                      | $          | 991 |   |   | $ | 991 |   |   | $ | — |   |   | $ | — |   |   | $ | — |   |   |

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(1)          See Note 24 to thecondensed consolidated financial statements.

Certain sales contracts include provisions under whichcustomers would be indemnified by us in the event of, among other things, athird-party claim against the customer for intellectual property rightsinfringement related to our products. There are no limitations on the maximumpotential future payments under these guarantees. We have not accrued anyamounts in relation to these provisions as no such claims have been made and webelieve we have valid enforceable rights to the intellectual property embeddedin our products.

Our $402.5 million of convertible subordinatednotes, due March 1, 2008, bear interest at a rate of 7¤8%per annum, payable semiannually on May 1 and September 1, areconvertible into the Company’s common stock at a conversion price of $23.79 pershare and are subordinated to all present and future senior debt of theCompany. The principal is due only at maturity of the notes.

We recorded a bank loan in connection with a purchaseof long-term asset resulting from the consolidation of MDC Holding and itsaffiliated entities (“MDC”). On January 10, 2003, a third partyestablished a bank loan with Shanghai Pudong Development Bank for the purchaseof the long-term asset. We assumed the obligations of the bank loan and relatedasset on January 23, 2003, which were subsequently transferred to MDC on December 31,2003. The bank loan of $8.2 million bears interest at a rate of 4.94% perannum, and expires on January 10, 2006. At March 31, 2004, we did notserve as legal obligor for the bank loan.

We issue standby lettersof credit primarily to support international sales activities outside of China.When we submit a bid for a sale, often the potential customer will require thatwe issue a bid bond or a standby letter of credit to demonstrate our commitmentthrough the bid process. In addition, we may be required to issue standbyletters of credit as guarantees for advance customer payments upon contractsigning or performance guarantees. The standby letters of credit usually expiresix to nine months from date of issuance without being drawn by the beneficiarythereof.

*Accounts receivabletransferred to notes receivable*

We accept commercial notesreceivable, with maturity dates between three and six months, from ourcustomers in China in the normal course of business. We may discount thesenotes with banking institutions in China. A sale of these notes is reflected asa reduction of notes receivable, and the proceeds of the settlement of thesenotes are included in cash flows from operating activities in the consolidatedstatement of cash flows. There were zero and $19.3 million of notes receivablesold during the three 

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monthsended March 31, 2004 and 2003, respectively. These notes are not includedin our consolidated balance sheets as the criteria for sale treatmentestablished by Statement of Financial Accounting Standards No. 140, “Accountingfor Transfers and Servicing of Financial Assets and Extinguishment ofLiabilities” (“SFAS 140”), has been met. Under SFAS 140, upon atransfer, the transferor or entity must derecognize financial assets whencontrol has been surrendered and the transferee obtains control over theassets. In addition, the transferred assets have been isolated from thetransferor, beyond the reach of its creditors, and the transferee has theright, without conditions or constraints, to pledge or exchange the assets ithas received. Notes receivable available for sale were $43.8 million and$11.4 million at March 31, 2004 and December 31, 2003,respectively.

*Joint VentureFunding*

Pursuant to the jointventure agreement with Matsushita, we are jointly liable for the lossesincurred in the operations of the joint venture up to the maximum of ourinvestment in the entity. At March 31, 2004, the losses had exceeded thisamount; however, we had accrued additional losses of approximately $1.0 milliondue to our commitment to fund an additional investment of $9.3 million duringthe second quarter of 2004.

*Investmentcommitments*

As of March 31, 2004,we had invested a total of $2.0 million in Global Asia Partners L.P. thatis recorded as a long-term investment. The fund size is anticipated to be$10.1 million and the fund was formed to make private equity investmentsin private or pre-IPO technology and telecommunications companies in Asia. Wehave a commitment to invest up to a maximum of $5.0 million. The remainingamount is due at such times and in such amounts as shall be specified in one ormore future capital calls to be issued by the general partner.

*Purchasecommitments*

We are obligated topurchase raw materials and work-in-process inventory under various orders fromone supplier, all of which should be fulfilled without adverse consequencesmaterial to our operations or financial condition. As of March 31, 2004total open commitments under these purchase orders were approximately $1.0million.

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

Our financial conditionand results of operations are based on certain critical accounting policies andestimates, which include judgments, estimates, and assumptions on the part ofmanagement. Estimates are based on historical experience, knowledge of economicand market factors and various other assumptions that management believes to bereasonable under the circumstances. Actual results may differ from thoseestimates. The following summary of critical accounting policies and estimateshighlights those areas of significant judgment in the application of ouraccounting policies that affect our financial condition and results ofoperations.

**RevenueRecognition and Product Warranty**

We recognize revenues from sales of telecommunicationsequipment when persuasive evidence of an arrangement exists, delivery of theproduct has occurred, customer acceptance has been obtained, the fee is fixedor determinable and collectability is reasonably assured. If the payment duefrom the customer is not fixed or determinable due to extended payment terms,revenue is recognized as payments become due from the customer, assuming allother criteria for revenue recognition are met. Normal payment terms differ forvarious reasons amongst different customer regions depending upon the commonbusiness 

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practices for customerswithin a region. Shipping and handling costs are recorded as revenues and costsof revenues. Any expected losses on contracts are recognized immediately.

Final acceptance is required in our complex multipleelement contractual arrangements since installation stretches over a time frameof six to twelve months, terms and deliverables are not finalized until projectcompletion, and customers extensively test the systems after installation.Final acceptance indicates that the customer has fully accepted delivery ofequipment and that we are entitled to the full payment. We will not recognizerevenue before final acceptance is granted by the customer if acceptance isconsidered substantive to the transaction. Additionally, we do not recognizerevenue when cash payments are received from customers for transactions that donot have the customer’s final acceptance. We record these cash receipts ascustomer advances, and defer revenue recognition until final acceptance isreceived.

Sales may be generated from complex contractualarrangements that require significant revenue recognition judgments,particularly in the areas of multiple element arrangements. Where multipleelements exist in an arrangement, the arrangement fee is allocated to thedifferent elements based upon verifiable objective evidence of the fair valueof the elements, as governed under EITF 00-21 and SEC Staff AccountingBulletin No. 104 “SAB 104.” Multiple element arrangements primarilyinvolve the sale of PAS or iPAS equipment with handsets, installation andtraining and the provision of such equipment to different locations for thesame customer.

Revenue is recognized as each element is earned,namely upon installation and acceptance of equipment or delivery of handsets;provided that the fair value of the undelivered element(s) has beendetermined, the delivered element has stand-alone value, there is no right ofreturn on delivered element(s), and we are in control of delivery of theundelivered element(s).

Where multiple elements exist in an arrangement thatincludes software, and the software is considered more than incidental to theequipment or services in the arrangement, software and software-relatedelements are recognized under the provisions of Statement of Position 97-2,as amended, and Emerging Issues Task Force Issue No. 03-05. TheCompany allocates revenues to each element of software arrangements based onvendor-specific objective evidence (“VSOE”). VSOE of each element is based onthe price charged when the same element is sold separately. We use the residualmethod to recognize revenue when an arrangement includes one or more elementsto be delivered at a future date and VSOE of the fair value of all theundelivered elements exists. Under the residual method, the fair value of the undeliveredelements is deferred and the remaining portion of the arrangement fee isrecognized as revenue. If evidence of fair value of one or more undeliveredelements does not exist, revenue is deferred and recognized when delivery ofthose elements occurs or when fair value can be established.

We also sell products, primarily handsets, throughresellers. Revenue is generally recognized when the standard price protectionperiod has lapsed, which ranges from 30 to 90 days. If collectabilitycannot be reasonably assured in a reseller arrangement, revenue is recognizedupon sell-through to the end customer and receipt of cash. In China, there maybe additional obligations in reseller arrangements such as inventory rotation,or stock exchange rights on the product. As such, revenue is recognized inaccordance with Statement of Financial Accounting Standards No. 48 “RevenueRecognition When Right of Return Exists.” We have developed reasonableestimates for stock exchanges. Estimates are derived from historical experiencewith similar types of sales of similar products.

We recognize revenue for system integration,installation and training upon completion of performance if all other revenuerecognition criteria are met. Other service revenue, such as that related tomaintenance and support contracts, is recognized ratably over the contractterm.

The assessment of collectability is also a factor indetermining whether revenue should be recognized. We assess collectabilitybased on a number of factors, including payment history and thecreditworthiness of the customer. We do not request collateral from ourcustomers in China. In global sales outside of 

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China, we often requireletters of credit that can be drawn on demand if a customer defaults on itspayment. If we determine that collection of a fee is not reasonably assured, werecognize revenue upon receipt of cash.

Because of the nature of doing business in China andother emerging markets, our billings and/or customer payments may not correlatewith the contractual payment terms and we generally do not enforce contractualpayment terms on complex, multiple-element arrangements prior to finalacceptance. Accordingly, these accounts receivable are not booked until werecognize the related customer revenue. Advances from customers are recognizedwhen we have collected cash from the customer prior to recognizing revenue.

We provide a warranty onour equipment and handset sales for a period generally ranging from one tothree years from the time of final acceptance. We provide for the expected costof product warranties at the time that we recognize revenue, based on ourassessment of past warranty experience. We continually monitor the level of ourwarranty expenses. If, however, there were to be a material adverse change inour product failure rates, an additional warranty provision would be required.Historically, our warranty experience has been within our expectations.

**Receivables**

We are required toestimate the collectability of our trade receivables and notes receivable. Wemaintain an allowance for doubtful accounts for the estimated losses on thetrade receivables and notes receivable. We assess collectability of thereceivable by determining whether the creditworthiness of the customer hasdeteriorated and could result in an inability to collect payment; ifcollectability is doubtful, we record an allowance against the receivable. Ifthe financial condition of our customers was to deteriorate and their abilityto make payments suffers as a result, we may need to increase our allowancesfor our receivables.

**Inventories**

Inventories consist ofinventories held at our manufacturing facility, warehouses or at customer sitesprior to signing of contracts. We may ship inventory to existing customers thatrequire additional equipment to expand their existing networks prior to thesigning of an expansion contract. Our inventories are stated at the lower ofcost or net realizable value, net of write-downs for excess, slow moving andobsolete inventory. Inventory is written down for estimated obsolescence orunmarketable inventory equal to the difference between inventory cost and theestimated market value. Write-downs are based on our assumptions about futuremarket conditions and customer demand, including projected changes in averageselling prices resulting from competitive pricing pressures. We continuallymonitor inventory valuation for potential losses and obsolete inventory at ourmanufacturing facilities as well as at customer sites.

**Deferredcosts/Inventories at Customer Sites Under Contracts**

Inventories at customersites under contracts awaiting final acceptance are classified as deferredcosts, separate from what we have historically considered inventory. These arestated at the lower of cost or net realizable value, net of reserves based uponassessment of potential losses and obsolescence during the lengthy acceptanceprocess. The title and risk of loss of this inventory is transferred to thecustomer upon delivery. Revenue and cost of sales are recorded when we receivefinal acceptance from the customer.

**Researchand Development and Capitalized Software Development Costs**

Our research anddevelopment costs are charged to expense as incurred. We capitalize softwaredevelopment costs incurred in the development of software that will ultimatelybe sold between the time technological feasibility has been attained and therelated product is ready for release. Management 

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judgmentis required in assessing technological feasibility, expected future revenues,estimated product lives and changes in product technologies, and the ultimaterecoverability of our capitalized software development costs.

**Deferred Income Taxes**

We recognize deferredincome taxes as the difference between the tax bases of assets and liabilitiesand their financial statement amounts based on enacted tax rates. Managementjudgment is required in the assessment of the recoverability of our deferredtax assets based on our assessment of projected taxable income. Numerousfactors could affect our results of operations in the future. If there was asignificant decline in our future operating results, our assessment of therecoverability of our deferred tax assets would need to be revised, and anysuch adjustment to our deferred tax assets would be charged to income in thatperiod. If necessary, we record a valuation allowance to reduce deferred taxassets to an amount management believes is more likely than not to be realized.

**Goodwill and Intangibles**

We have recorded goodwilland intangible assets in connection with our business acquisitions. Managementjudgment is required in the assessment of the related useful lives, assumptionsregarding our ability to successfully develop and ultimately commercializeacquired technology, and assumptions regarding the fair value and therecoverability of these assets. We perform our annual goodwill impairmentreview in the fourth quarter of each year or when changes in circumstancesindicate a potential impairment. We currently operate as a single reportablesegment without reporting units, as our management evaluates performance, makeoperating decisions and allocates resources based on consolidated financialdata. As such, we determine whether impairment to goodwill is necessary on aconsolidated basis. When assessing potential impairment to goodwill, we compareour book value to our fair market value. Fair market value is our marketcapitalization at the date impairment is assessed. Historically, our fairmarket value has exceeded our book value and no impairment has been necessary.

**Long-Term Investments**

We have invested in a fundfocused on investments in Internet companies in China and a fund focused oninvestments in companies in Asia undergoing restructuring or bankruptcyprocedures. We have also invested directly in a number of privatetechnology-based companies in the early stages of development and in technologycompanies publicly listed or traded on Nasdaq and NYSE. While quoted marketprices are readily available to determine the fair value of our investments inthese publicly traded companies, management judgment is required to determinewhen losses are other than temporary. Furthermore, management judgment isrequired in evaluating the carrying value of our private company investmentsfor possible impairment. For our private technology company investments, weassess impairment based on an evaluation of the achievement of businessobjectives and milestones, the financial condition and prospects of thesecompanies and other relevant factors. We continually monitor these investmentsfor impairment, and charge to income any impairment amounts in the period sucha determination is made.

**RECENT ACCOUNTING PRONOUNCEMENTS**

In November 2003, theEITF issued EITF No. 03-*6 “Participating Securities and the Two-Class Method under FASB Statement No. 128,”*which provides for a two-class method of calculating earnings pershare computations that relate to certain securities that would be consideredto be participating in conjunction with certain common stock rights. Thisguidance would be applicable starting with the second quarter beginning April 1,2004. We are currently evaluating the potential impact of this pronouncement onour financial statements.

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**FACTORS AFFECTING FUTURE OPERATING RESULTS**

**RISKS RELATED TO OUR COMPANY**

***Our future product sales are unpredictable and, as aresult, our operating results are likely to fluctuate from quarter to quarter.***

Our quarterly and annual operating results have fluctuatedin the past and are likely to fluctuate in the future due to a variety offactors, some of which are outside of our control. Factors that may affect ourfuture operating results, in addition to those described below, include:

·       thetiming and size of the orders for our products;

·       changesin our customers’ subscriber growth rate;

·       thelengthy and unpredictable sales cycles associated with sales of our products;

·       cancellation,deferment or delay in implementation of large contracts;

·       ourrevenue recognition, which is based on acceptance, is unpredictable;

·       aseasonal reoccurrence of an outbreak of severe acute respiratory syndrome(SARS) or other illnesses affecting areas in which we operate;

·       thedecline in business activity we typically experience during the Lunar New Year,which leads to decreased sales during our first fiscal quarter relative tohistorical and expected year-long trends; and

·       changesin accounting rules, such as recording expenses related to employee stockoption compensation plans.

As a result of these andother factors, period-to-period comparisons of our operating results are notnecessarily meaningful or indicative of future performance. Furthermore, it ispossible that in some future quarters our operating results will fall below theexpectations of securities analysts or investors. If this occurs, the tradingprice of our common stock could decline.

***Competition in our markets may lead to reduced prices,revenues and market share.***

We believe that we willcontinue to face intense competition from both domestic and internationalcompanies in our target markets, many of which may operate under lower coststructures or may be given preferential treatment by applicable governmentalregulators and policies and have much larger sales forces than we do.Additionally, other companies not presently offering competing products mayalso enter our target markets. Many of our competitors have significantlygreater financial, technical, product development, sales, marketing and otherresources than we do. As a result, our competitors may be able to respond morequickly to new or emerging technologies and changes in service providerrequirements. Our competitors may also be able to devote greater resources thanwe can to the development, promotion and sale of new products. Thesecompetitors may be able to offer significant financing arrangements to serviceproviders, which may give them a competitive advantage in selling systems toservice providers with limited financial and currency resources. In many of thedeveloping markets in which we operate or intend to operate, relationships withlocal governmental telecommunications agencies are important to establish andmaintain. In many such markets, our competitors may have or be able to establishbetter relationships with local governmental telecommunications agencies thanwe have, which could result in their ability to influence governmental policyformation and interpretation to their advantage. Additionally, our competitorsmight have better relationships with their third-party suppliers and obtaincomponent parts at a reduced rate, allowing them to offer their end products atreduced prices. Increased competition is likely 

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toresult in price reductions, reduced gross profit as a percentage of net salesand loss of market share, any one of which could materially harm our business,financial condition, cash flows, and results of operations.

***The average selling prices of our products maydecrease, which may reduce our revenues and our gross profit. As a result, wemust introduce new products and reduce our costs in order to maintainprofitability.***

The average sellingprices for communications access and switching systems and handsets havehistorically declined as a result of a number of factors, including:

·       increasedcompetition;

·       aggressiveprice reductions by competitors; and

·       rapidtechnological change.

The average selling prices of our products maycontinue to decrease in the future in response to product introductions by usor our competitors or other factors, including price pressures from customers.Therefore, we must continue to develop and introduce new products andenhancements to existing products that incorporate features that can be sold athigher average selling prices. Failure to do so could cause our revenues andgross profit to decline.

Our cost reduction effortsmay not allow us to keep pace with competitive pricing pressures or lead toimproved gross profit, as a percentage of net sales. In order to becompetitive, we must continually reduce the cost of manufacturing our productsthrough design and engineering changes. We may not be successful in theseefforts or in delivering our products to market in a timely manner. Inaddition, any redesign may not result in sufficient cost reductions to allow usto reduce the prices of our products to remain competitive or to improve ormaintain our gross profit, as a percentage of net sales, which would cause ourfinancial results to suffer.

***Sales in China have accounted for most of our total sales,and our business, financial condition and results of operations are to asignificant degree subject to economic, political and social events in China.***

Approximately $570.6million, or 92%, and $268.9 million, or 81%, of our net sales for the three monthsended March 31, 2004 and 2003, respectively, occurred in China. While weanticipate expansion into other foreign markets, a significant majority of ournet sales will be derived from China for the foreseeable future. In addition,we plan to continue to make further investments in China in the future.Therefore, our business, financial condition and results of operations are to asignificant degree subject to economic, political, legal and socialdevelopments and other events in China. Please read the risks detailed belowunder the heading “Risks Related to Conducting Business in China” foradditional information about the risks we face in connection with our Chinaoperations.

***Our market is subject to rapid technological change,and to compete effectively, we must continually introduce new products andproduct enhancements that achieve market acceptance.***

The market for communications equipment ischaracterized by rapid technological developments, frequent new productintroductions and evolving industry and regulatory standards. Our success willdepend in large part on our ability to enhance our network and broadband accessand switching technologies and develop and introduce new products and productenhancements that anticipate changing service provider requirements andtechnological developments. We may need to make substantial capitalexpenditures and incur significant research and development costs to developand introduce new products and enhancements. If we fail to develop andintroduce new products or enhancements to existing products that effectivelyrespond to technological change on a timely basis, our business, financialcondition and results of operations could be materially adversely affected.Moreover, from time to time, our competitors or we may announce new products orproduct enhancements, technologies or services that have the 

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potential to replace orshorten the life cycles of our products and that may cause customers to deferpurchasing our existing products, resulting in inventory obsolescence. Futuretechnological advances in the communications industry may diminish or inhibitmarket acceptance of our existing or future products or render our productsobsolete.

Even if we are ableto develop and introduce new products, they may not gain market acceptance.Market acceptance of our products will depend on various factors, including:

·       ourability to obtain necessary approvals from regulatory organizations within thecountries in which we operate and for any new technologies that we introduce;

·       thelength of time it takes service providers to evaluate our products, causing thetiming of purchases to be unpredictable;

·       ourproducts being compatible with legacy technologies and standards existing inpreviously deployed network equipment;

·       ourability to attract customers who may have preexisting relationships with ourcompetitors;

·       productcost relative to performance; and

·       thelevel of customer service available to support new products.

If our products fail toobtain market acceptance in a timely manner, our business could suffer.

***We depend on some sole source and other key suppliers,as well as international sources, for handsets, base stations, components andmaterials used in our products. If we cannot obtain adequate supplies of highquality products at competitive prices or in a timely manner from thesesuppliers or sources, our competitive position, reputation and business couldbe harmed.***

We have contracts with a single supplier or with alimited group of suppliers to purchase some components and materials used inour products. If any supplier is unwilling or unable to provide us withhigh-quality components and materials in the quantities required and at thecosts specified by us, we may not be able to find alternative sources on favorableterms, in a timely manner, or at all. Our inability to obtain or to developalternative sources if and as required could result in delays or reductions inmanufacturing or product shipments. From time to time, there could be shortagesof different products or components. For example, in 2001 and 2002 there was aworldwide shortage of handset components resulting from our third-partymanufacturers’ inability to assemble and manufacture a sufficient quantity ofhandsets to keep pace with consumer demand. Moreover, our suppliers may supplyus with inferior quality products. If an inferior product supplied by a thirdparty is embedded in our end product and causes a problem, it might bedifficult to identify the source of the problem as being due to the componentparts. If any of these events occur, our competitive position, reputation andbusiness could suffer.

Our ability to source asufficient quantity of high-quality, cost-effective components used in ourproducts may also be limited by import restrictions and duties in the foreigncountries in which we manufacture our products. We require a significant numberof imported components to manufacture our products, and imported electroniccomponents and other imported goods used in the operation of our business maybe limited by a variety of permit requirements, approval procedures, importduties and registration requirements. Moreover, import duties on suchcomponents increase the cost of our products and may make them lesscompetitive.

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***If we seek to secure additional financing and are notable to do so, our ability to expand strategically may be limited. If we areable to secure additional financing, our stockholders may experience dilutionof their ownership interest, or we may be subject to limitations on ouroperations and increased leverage.***

We currently anticipatethat our available cash resources, which include existing cash and cashequivalents, short-term investments and cash from operations, will besufficient to meet our anticipated needs for working capital and capitalexpenditures for the foreseeable future. If we are unable to generatesufficient cash flows from operations, we may need to raise additional funds todevelop new or enhanced products, respond to competitive pressures, takeadvantage of acquisition opportunities or raise capital for strategic purposes.If we raise additional funds through the issuance of equity securities, ourstockholders will experience dilution of their ownership interest, and thenewly issued securities may have rights superior to those of common stock. Ifwe raise additional funds by issuing debt, we may be subject to limitations onour operations and increase our leverage. For example, in connection with thesale of convertible debt securities in March 2003, we incurred$402.5 million of indebtedness. As a result of this indebtedness, ourprincipal and interest payment obligations have increased substantially. Thedegree to which we are leveraged could materially and adversely affect ourability to obtain financing for working capital, acquisitions or other purposesand could make us more vulnerable to industry downturns and competitivepressures. Our ability to meet our debt service obligations will be dependentupon our future performance, which will be subject to financial, business andother factors affecting our operations, many of which are beyond our control.Finally, additional sources of financing may not be available on reasonableterms or at all if and when we require it, which could harm our business.

***Our recent growth has strained our resources, and ifwe are unable to manage and sustain our growth, our operating results will benegatively affected.***

We have recentlyexperienced a period of rapid growth and anticipate that we must continue toexpand our operations to address potential market opportunities. Our expansionhas placed and will continue to place a significant strain on our management,operational, financial and other resources. To manage our growth effectively,we will need to take various actions, including:

·       enhancingmanagement information systems and forecasting procedures;

·       furtherdeveloping our operating, administrative, financial and accounting systems andcontrols;

·       managingour working capital and sources of financing to fund our expansion;

·       maintainingclose coordination among our engineering, accounting, finance, marketing, salesand operations organizations;

·       expanding,training and managing our employee base;

·       managingthe expansion of both our direct and indirect sales channels in acost-efficient and competitive manner; and

·       fullyreview our new customers’ credit histories and ensure their financial stabilitybefore finalizing contracts.

If we fail to implement orimprove systems or controls or to manage any future growth and expansioneffectively, our business could suffer.

***Our success is dependent on continuing to hire andretain qualified personnel, and if we are not successful in attracting andretaining these personnel, our business will suffer.***

The success of our business depends in significantpart upon the continued contributions of key technical and senior managementpersonnel, many of whom would be difficult to replace. In particular, our 

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success depends in largepart on the knowledge, expertise and services of Hong Liang Lu, our Chairman ofthe Board, President and Chief Executive Officer, and Ying Wu, our Chairman andChief Executive Officer of China Operations. The loss of any key employee, thefailure of any key employee to perform satisfactorily in his or her current positionor our failure to attract and retain other key technical and senior managementemployees could have a significant negative impact on our operations.

To effectively manage our recent growth as well as anyfuture growth, we will need to recruit, train, assimilate, motivate and retainqualified employees both locally and internationally. Competition for qualifiedemployees is intense, and the process of recruiting personnel with thecombination of skills and attributes required to execute our business strategycan be difficult, time-consuming and expensive. As we grow globally, we mustimplement hiring and training processes that are capable of quickly deployingqualified local residents to knowledgeably support our products and services.Alternatively, if there is an insufficient number of qualified local residentsavailable, we might incur substantial costs importing expatriates to servicenew global markets. For example, we have historically experienced difficultyfinding qualified accounting personnel knowledgeable in both U.S. and Chineseaccounting standards who are Chinese residents. If we fail to attract, hire,assimilate or retain qualified personnel, our business would be harmed.

Competitors and othershave in the past, and may in the future, attempt to recruit our employees. Inaddition, companies in the telecommunications industry whose employees acceptpositions with competitors frequently claim that the competitors have engagedin unfair hiring practices. We may be the subject of these types of claims inthe future as we seek to hire qualified personnel. Some of these claims mayresult in material litigation and disruption to our operations. We could incursubstantial costs in defending ourselves against these claims, regardless oftheir merit.

***Any acquisitions that we undertake could be difficultto integrate, disrupt our business, dilute our stockholders and harm ouroperating results.***

We may acquire otherbusinesses, products and technologies. For example, on May 23, 2003, wepurchased certain assets and liabilities of the CommWorks division of 3ComCorporation for $100.0 million in cash and incurred related transactionand other related costs of $9.3 million. Any anticipated benefits of anacquisition may not be realized. We have in the past and will continue toevaluate acquisition prospects that would complement our existing productofferings, augment our market coverage, enhance our technological capabilities,or that may otherwise offer growth opportunities. Acquisitions may result in dilutiveissuances of equity securities, use of our cash resources, the incurrence ofdebt and the amortization of expenses related to intangible assets. Inaddition, acquisitions involve numerous risks, including difficulties in theassimilation of operations, technologies, products and personnel of theacquired company, diversion of management’s attention from other businessconcerns, risks of entering markets in which we have no direct or limited priorexperience, the potential loss of key employees of the acquired company,unanticipated costs and, in the case of the acquisition of financially troubledbusinesses, challenges as to the validity of such acquisitions from third partycreditors of such businesses.

***We may be unable to adequately protect the loss ormisappropriation of our intellectual property, which could substantially harmour business.***

We rely on a combinationof patents, copyrights, trademarks, trade secret laws and contractualobligations to protect our technology. We have applied for patents in theUnited States and internationally. Additional patents may not be issued fromour pending patent applications, and our issued patents may not be upheld. Inaddition, we have, from time to time, chosen to abandon previously filedapplications. Moreover, we may face difficulties in registering our existingtrademarks in new jurisdictions in which we operate. We cannot guarantee thatthe intellectual property protection measures that we have taken will be 

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sufficientto prevent misappropriation of our technology or trademarks or that ourcompetitors will not independently develop technologies that are substantiallyequivalent or superior to ours. In addition, the legal systems of many foreigncountries do not protect or honor intellectual property rights to the sameextent as the legal system of the United States. For example, in China, thelegal system in general, and the intellectual property regime in particular,are still in the development stage. It may be very difficult, time-consumingand costly for us to attempt to enforce our intellectual property rights inthese jurisdictions.

***We may be subject to claims that we infringe theintellectual property rights of others, which could substantially harm ourbusiness.***

The industry in which we compete is moving towardsaggressive assertion, licensing, and litigation of patents and otherintellectual property rights. From time to time, we have become aware of thepossibility or have been notified that we may be infringing certain patents orother intellectual property rights of others. Regardless of their merit,responding to such claims could be time consuming, divert management’sattention and resources and cause us to incur significant expenses. Inaddition, although some of our supplier contracts provide for indemnificationfrom the supplier with respect to losses or expenses incurred in connectionwith any infringement claim, some of our contracts do not provide for suchprotection. Moreover, certain of our sales contracts provide that we mustindemnify our customers against claims by third parties for intellectualproperty rights infringement related to our products. There are no limitationson the maximum potential future payments under these guarantees. Therefore, wemay incur substantial costs related to any infringement claim, which maysubstantially harm our results of operations and financial condition.

We may, in the future, become subject to litigation todefend against claimed infringements of the rights of others or to determinethe scope and validity of the proprietary rights of others. Future litigationmay also be necessary to enforce and protect our trade secrets and otherintellectual property rights. Any intellectual property litigation orthreatened intellectual property litigation could be costly, and adversedeterminations or settlements could result in the loss of our proprietaryrights, subject us to significant liabilities, require us to seek licenses fromor pay royalties to third parties which may not be available on commerciallyreasonable terms, if at all, and/or prevent us from manufacturing or sellingour products, which could cause disruptions to our operations.

In the event that there isa successful claim of infringement against us and we fail to developnon-infringing technology or license the propriety rights on commerciallyreasonable terms and conditions, our business, results of operations orfinancial condition could be materially and adversely impacted.

***Our multinational operations subject us to variouseconomic, political, regulatory and legal risks.***

We market and sellour products globally, with the majority of our sales made in China. Theexpansion of our existing multinational operations and entry into new marketswill require significant management attention and financial resources.Multinational operations are subject to a variety of risks, such as:

·       theburden of complying with a variety of foreign laws and regulations;

·       theburden of complying with United States laws and regulations for foreignoperations, including the Foreign Corrupt Practices Act;

·       difficultycomplying with continually evolving and changing global product andcommunications standards and regulations for both our end products and theircomponent technology;

·       marketacceptance of our new products, including longer product acceptance periods innew markets into which we enter;

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·       relianceon local original equipment manufacturers (OEMs), third-party distributors andagents to effectively market and sell our products;

·       unusualcontract terms required by customers in developing markets;

·       changesin local governmental control or influence over our customers;

·       changesto import and export regulations, including quotas, tariffs, licensingrestrictions and other trade barriers;

·       evolvingand unpredictable nature of the economic, regulatory, competitive and politicalenvironments;

·       reducedprotection for intellectual property rights in some countries;

·       longeraccounts receivable collection periods; and

·       difficultiesand costs of staffing and managing multinational operations, including but notlimited to internal control and compliance.

***We do business in markets that are not fullydeveloped, which subjects us to various economic, political, regulatory andlegal risks unique to developing economies.***

Less developedmarkets present additional risks, such as the following:

·       customersthat may be unable to pay for our products in a timely manner or at all;

·       newand unproven markets for our products and the telecommunications services thatour products enable;

·       inconsistentinfrastructure support;

·       lackof a large, highly trained workforce;

·       difficultyin controlling local operations from our headquarters;

·       variableethical standards and an increased potential for fraud;

·       unstablepolitical and economic environments; and

·       alack of a secure environment for our personnel, facilities and equipment.

In particular, thesefactors create the potential for physical loss of inventory and operatingassets. We have in the past experienced cases of vandalism and armed theft ofour equipment that had been or was being installed in the field. If disruptionsfor any of these reasons become too severe in any particular market, it maybecome necessary for us to terminate contracts and withdraw from that marketand suffer the associated costs and lost revenue.

***We are subject to risks relating to currency ratefluctuations and exchange controls.***

Because most of our sales are made in foreigncountries, we are exposed to market risk for changes in foreign exchange rateson our foreign currency-denominated accounts and notes receivable balances. Wedo not currently hedge our foreign currency-denominated transactions.Historically, the majority of our sales have been made in China and denominatedin Renminbi; as such, the impact of currency fluctuations of Renminbi thus farhas been insignificant as it is fixed to the U.S. dollar. However, in thefuture, China could choose to devalue the Renminbi versus the U.S. dollar, orthe Renminbi-U.S. dollar exchange rate could float, and the Renminbi coulddepreciate relative to the U.S. dollar. Fluctuations in currency exchange ratesin the future may have a material adverse effect on our results of operations.

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We enter into transactions that may expose us toforeign currency rate fluctuation risk. Historically, the largest component ofour foreign currency exchange loss has resulted from our purchasing inventorydenominated in foreign currencies. If we continue to purchase inventory inforeign currencies, we may incur additional foreign currency exchange losses,causing our operating results to suffer.

Moreover, some of theforeign countries in which we do business might impose currency restrictionthat may limit the ability of our subsidiaries and joint ventures in suchcountries to obtain and remit foreign currency necessary for the purchase ofimported components and may limit our ability to obtain and remit foreigncurrency in exchange for foreign earnings. For example, China employs currencycontrols restricting Renminbi conversion, limiting our ability to engage incurrency hedging activities in China. Various foreign exchange controls mayalso make it difficult for us to repatriate earnings, which could have amaterial adverse effect on our ability to conduct business globally.

***Business interruptions could adversely affect ourbusiness.***

Our operations arevulnerable to interruption by fire, earthquake, power loss, telecommunicationsfailure, external interference with our information technology systems,incidents of terrorism and other events beyond our control. For example, ourHangzhou manufacturing facility’s ability to produce sufficient products isdependent upon a continuous power supply, and the power required to source ourmanufacturing operations is inconsistent. The Hangzhou facility has in the pastbeen subject to power shortages, which has affected our ability to produce andship sufficient products. We do not have a detailed disaster recovery plan, andthe occurrence of any events like these that disrupt our business could harmour operating results.

***We may suffer losses with respect to equipment held atcustomer sites, which could harm our business.***

We face the risk of lossrelating to our equipment held at customer sites. In some cases, our equipmentheld at customer sites is under contract, pending final acceptance by thecustomer. We do not hold title or risk of loss on such equipment, as title andrisk of loss are typically transferred to the customer upon delivery of ourequipment. However, we do not recognize revenue and accounts receivable withrespect to the sale of such equipment until we obtain acceptance from thecustomer. If we do not obtain final acceptance, we may not be able to collectthe contract price and recover this equipment or its associated costs. In othercases, particularly in China, where governmental approval is required tofinalize certain contracts, inventory not under contract may be held atcustomer sites. We hold title and risk of loss on this inventory until thecontracts are finalized and, as such, are subject to any losses incurredresulting from any damage to or loss of this inventory. If our contractnegotiations fail or if the government of China otherwise delays approvingcontracts, we may not recover or receive payment for this inventory. Moreover,our insurance may not cover all losses incurred if our inventory at customersites not under contracts is damaged prior to contract finalization. If weincur a loss relating to inventory for any of the above reasons, our operatingresults could be harmed.

***We have been named as a defendant in securitieslitigation.***

We and various underwriters for our initial publicoffering are defendants in a purported shareholder class action. The complaintalleges undisclosed improper underwriting practices concerning the allocationof IPO shares, in violation of the federal securities laws. Similar complaintshave been filed concerning the IPOs of more than 300 companies, and thelitigation has been coordinated in United States District Court for theSouthern District of New York as In re Initial Public Offering SecuritiesLitigation, 21 MC 92. Although we believe we have valid defenses to the claimsagainst us and intend to defend the litigation vigorously, until the matter isresolved, it will be necessary for us to continue to expend time and financialresources on the matter. Moreover, an adverse judgment in the litigation couldmaterially harm our operations.

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***Recently enacted and proposed changes in securitieslaws and regulations are likely to increase our costs.***

The Sarbanes-Oxley Act of2002 has required and will continue to require changes in some of our corporategovernance and securities disclosure or compliance practices. That Act alsorequires the SEC to promulgate new rules on a variety of subjects, inaddition to rule proposals already made, and The Nasdaq National Markethas revised its requirements for companies that are Nasdaq-listed. We expectthese developments will require us to devote additional resources to ouroperational, financial and management information systems procedures andcontrols to ensure our continued compliance with current and future laws andregulations. We expect these developments to make it more difficult and moreexpensive for us to obtain director and officer liability insurance, and we maybe required to accept reduced coverage, increase our level of self-insurance,or incur substantially higher costs to obtain coverage. These developmentscould make it more difficult for us to attract and retain qualified members ofour board of directors, or qualified executive officers. We are presentlyevaluating and monitoring regulatory developments and cannot estimate thetiming or magnitude of additional costs we may incur as a result.

***Changes in accounting rules.***

We prepare our financialstatements in conformity with accounting principles generally accepted in theUnited States of America. These principles are subject to interpretation by theSecurities and Exchange Commission and various bodies formed to interpret andcreate appropriate accounting policies. A change in these policies can have asignificant effect on our reported results and may even retroactively affectpreviously reported transactions. In particular, changes to FinancialAccounting Standards Board (FASB) guidelines relating to accounting forstock-based compensation will likely increase our compensation expense, couldmake our net income less predictable in any given reporting period and couldchange the way we compensate our employees or cause other changes in the way weconduct our business.

**RISKS RELATED TO CONDUCTING BUSINESS IN CHINA**

***China’s governmental and regulatory reforms may impactour ability to do business in China.***

The Chinesegovernment, through the Ministry of Information Industry, the Chinesetelecommunication industry’s regulating body, has broad discretion andauthority over all aspects of the telecommunications and information technologyindustry in China, with the power to permit or prohibit the sales of any of ourproducts. Since 1978, the Chinese government has been in a state of evolutionand reform. The reforms have resulted in and are expected to continue to resultin significant economic and social development in China. Many of the reformsare unprecedented or experimental and may be subject to change or readjustmentdue to a variety of political, economic and social factors. While we anticipatethat the basic principles underlying the reforms will remain unchanged, any ofthe following changes in China’s political and economic conditions andgovernmental policies could have a substantial impact on our business:

·       thepromulgation of new laws and regulations and the interpretation of those laws andregulations;

·       inconsistentenforcement and application of the telecommunications industry’s rules andregulations by the Chinese government between foreign and domestic companies;

·       theintroduction of measures to control inflation or stimulate growth;

·       theintroduction of new guidelines for tariffs and service rates, which affect ourability to competitively price our products and services;

·       changesin the rate or method of taxation;

·       theimposition of additional restrictions on currency conversion and remittancesabroad; or

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·       anyactions which limit our ability to develop, manufacture, import or sell ourproducts in China, or to finance and operate our business in China.

For example, in the year 2000, the Ministry ofInformation Industry temporarily halted deployment of our PAS systems andhandsets, pending its review of personal handyphone system (“PHS”)-basedtelecommunications equipment, a microcellular wireless communicationstechnology. The Ministry of Information Industry later allowed the continueddeployment of PHS-based systems, such as our PAS systems and handsets, in China’scounty-level cities, towns and villages but limited deployments within largeand medium-sized cities to very limited areas of dense population, such ascampuses, commercial buildings and special development zones. If in the futurethe Ministry of Information Industry determines to prohibit the sale ordeployment of our PAS systems and handsets or our other products, or if itimposes additional limitations on their sale, our business and financialcondition could suffer.

In addition to modifyingthe existing telecommunications regulatory framework, the Chinese government iscurrently preparing a draft of a standard, national telecommunications law (the“Telecommunications Law”) to provide a uniform regulatory framework for thetelecommunications industry. We do not yet know the final nature or scope ofthe regulation that would be created if the Telecommunications Law is passed.Accordingly, we cannot predict whether it will have a positive or negativeeffect on us or on some or all aspects of our business.

***China’s changing economic environment may impact ourability to do business in China.***

Since 1978, the Chinesegovernment has been reforming the economic system in China to increase emphasisplaced on decentralization and the utilization of market forces in thedevelopment of China’s economy. These reforms have resulted in significanteconomic growth. However, any economic reform policies or measures in China mayfrom time to time be modified or revised by the Chinese government. While wemay be able to benefit from the effects of some of these policies, thesepolicies and other measures taken by the Chinese government to regulate theeconomy could also have a significant negative impact on economic conditions inChina, which would result in a negative impact on our business. More recently,China’s economic environment has been changing as a result of China’s entryinto the World Trade Organization (WTO), which was effective in December of2001. Entry into the WTO requires that China reduce tariffs and eliminatenon-tariff barriers, including quotas, licenses and other restrictions, by 2005at the latest, and we cannot predict the impact of these changes on China’seconomy. Moreover, although China’s entry into the WTO and the relatedrelaxation of trade restrictions may lead to increased foreign investment, itmay also lead to increased competition in China’s markets from other foreigncompanies. If China’s entry into the WTO results in increased competition orhas a negative impact on China’s economy, our business could suffer. Inaddition, although China is increasingly according foreign companies andforeign investment enterprises established in China the same rights and privilegesas Chinese domestic companies as a result of its admission into the WTO,special laws, administrative rules and regulations governing foreigncompanies and foreign investment enterprises in China may still place foreigncompanies at a disadvantage in relation to Chinese domestic companies and mayadversely affect our competitive position.

***Uncertainties with respect to the Chinese legal systemmay adversely affect us.***

We conduct our business inChina primarily through our wholly-owned subsidiaries incorporated in China.Our subsidiaries are generally subject to laws and regulations applicable toforeign investment in China. Accordingly, our business might be affected byChina’s developing legal system. Since 1978, many new laws and regulationscovering general economic matters have been promulgated in China, andgovernment policies and internal rules promulgated by governmentalagencies may not be published in time, or at all. As a result, we may operateour business in violation of new rules and policies without having anyknowledge of their existence. In addition, there are uncertainties regardingthe interpretation 

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andenforcement of laws, rules and policies in China. The Chinese legal systemis based on written statutes, and prior court decisions have limitedprecedential value. Because many laws and regulations are relatively new andthe Chinese legal system is still evolving, the interpretations of many laws,regulations and rules are not always uniform. Moreover, the relativeinexperience of China’s judiciary in many cases creates additional uncertaintyas to the outcome of any litigation, and the interpretation of statutes andregulations may be subject to government policies reflecting domestic politicalchanges. Finally, enforcement of existing laws or contracts based on existinglaw may be uncertain and sporadic, and it may be difficult to obtain swift andequitable enforcement, or to obtain enforcement of a judgment by a court ofanother jurisdiction. Any litigation in China may be protracted and result insubstantial costs and diversion of resources and management attention.

***We only have trial licenses to sell certain of ournetwork access products in China.***

Under China’s current regulatory structure, thecommunications products that we offer in China must meet government andindustry standards, and a network access license for the equipment must beobtained. Without a license, telecommunications equipment is not allowed to beconnected to public telecommunications networks or sold in China. Moreover, wemust ensure that the quality of the telecommunications equipment for which wehave obtained a network access license is stable and reliable, and will notlower the quality or performance of other installed licensed products. China’sState Council’s product quality supervision department, in concert with China’sMinistry of Information Industry, performs spot checks to track and supervisethe quality of licensed telecommunications equipment and publishes the resultsof such spot checks.

We have obtained aprobationary network access license for our mSwitch product, and after thetrial period, we anticipate that an official network access license will beissued if the trial demonstrates that mSwitch satisfies all the applicablegovernment and industry standards. However, we cannot be certain that we willreceive this license. Moreover, we only have trial licenses for our PAS systemsand handsets. We have applied for, but have not yet received, a final officialnetwork access license for our PAS systems and handsets. Based uponconversations with China’s Ministry of Information Industry, we understand thatour PAS systems and handsets are considered to still be in the trial period andthat sales of our PAS systems and handsets may continue to be made by us duringthis trial period, but that a license will ultimately be required. If we failto obtain the required licenses, we could be prohibited from making furthersales of the unlicensed products, including our PAS systems and handsets, inChina, which would substantially harm our business, financial condition andresults of operations. The regulations implementing these requirements are notvery detailed, have not been applied by a court and may be interpreted andenforced by regulatory authorities in a number of different ways. Our counselin China has advised us that China’s governmental authorities may interpret orapply the regulations with respect to which licenses are required and theability to sell a product while a product is in the trial period in a mannerthat is inconsistent with the information received by our counsel in China, andeither of these conditions could have a material adverse effect on ourbusiness, financial condition and results of operations.

***If China Telecom or China Netcom obtains licensesallowing them to deliver mobile services, our ability to sell our PAS mobilesystems and handsets could be impaired.***

China Telecom and China Netcom hold and operate thefixed line telephone and data communications assets in China, and currently donot have the licenses necessary to offer mobile services. However, China’smedia sources have widely reported that China’s Ministry of InformationIndustry may grant mobile licenses to the new China Telecom or China Netcom, orto both toward the end of 2004. Furthermore, it is anticipated that the mobilelicense granted by the government will be used for 3G mobile networkdeployments.

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If China Telecom or ChinaNetcom obtains 3G mobile licenses, they may direct capital expenditures tobuild-out 3G networks, and capital expenditures to build-out PAS networks thatutilize our existing products may decline. Moreover, they may elect not todeploy our PAS systems and handsets or other mobile services that we may offerin the future. In addition, it is possible that current PAS frequency bandsutilized by PAS networks may be reallocated for use by 3G networks, which wouldhave the effect of restricting or shutting down PAS networks. If this were tooccur, we could lose current and potential future customers for our products,and our financial condition and results of operations could be significantlyharmed.

***Promotional or incentive programs offered by mobileoperators such as China Mobile and China Unicom may adversely impact thecompetitiveness and pricing of our PAS systems and related products.***

The official tariffs andper-minute usage rates charged to mobile users in China are generally set bythe Ministry of Information Industry and the National Development and ReformCommission, and are usually adhered to by mobile operators. However, from timeto time, certain mobile operators such as China Mobile and China Unicom haveoffered special promotional pricing or incentives to customers, such as freeincoming calls or free mobile-to-mobile calls. The continued use of suchincentive programs by mobile operators may adversely impact the competitivenessand pricing of our PAS systems and related products and their rollout by thenew China Telecom and China Netcom. Such incentive programs may continue or beexpanded in the future. We cannot be certain as to what impact such incentiveprograms may have on our financial condition. However, it is possible that thecontinuation or expansion of such programs may have a material adverse effecton our business or results of operations.

***If tax benefits available to our subsidiaries locatedin China are reduced or repealed, our business could suffer.***

The Chinese government isconsidering the imposition of a “unified” corporate income tax that would phaseout, over time, the preferential tax treatment to which foreign investmententerprises, such as our company, are currently entitled. While it is notcertain whether the government will implement such a unified tax structure orwhether our company will be grandfathered into any new tax structure, if a newtax structure is implemented, a new tax structure may adversely affect ourfinancial condition. Moreover, certain of our subsidiaries and joint ventureslocated in China enjoy tax benefits in China that are generally available toforeign investment enterprises. If these tax benefits are reduced or repealeddue to changes in tax laws, our business could suffer. We are currentlyapplying for the ability to share research and development costs among our keyworldwide entities. This is a new concept in China, and we are working closelywith the China Tax and Regulatory Authorities to gain approval for this costsharing. If the cost sharing is not approved by China, our effective tax ratemay increase.

**RISKS RELATED TO OUR STOCK PERFORMANCE AND**CONVERTIBLE DEBT SECURITIES

***Our stock price is highly volatile.***

The trading priceof our common stock has fluctuated significantly since our initial publicoffering in March of 2000. Our stock price could be subject to widefluctuations in the future in response to many events or factors, includingthose discussed in the preceding risk factors relating to our operations, aswell as:

·       actualor anticipated fluctuations in operating results, actual or anticipated grossprofit as a percentage of net sales, levels of inventory, our actual oranticipated rate of growth and our actual or anticipated earnings per share;

·       changesin expectations as to future financial performance or changes in financialestimates or buy/sell recommendations of securities analysts;

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·       changesin governmental regulations or policies in China, such as the temporarysuspension of sales of our PAS systems that occurred in May and June of2000, which caused our stock price to drop;

·       our,or a competitor’s, announcement of new products, services or technologicalinnovations;

·       theoperating and stock price performance of other comparable companies; and

·       newsand commentary emanating from the media, securities analysts or governmentbodies in China relating to us and to the industry in general.

General market conditions and domestic orinternational macroeconomic factors unrelated to our performance may alsoaffect our stock price. For these reasons, investors should not rely on recenttrends to predict future stock prices or financial results. In addition,following periods of volatility in a company’s securities, securities classaction litigation against a company is sometimes instituted. This type oflitigation could result in substantial costs and the diversion of managementtime and resources.

In addition, publicannouncements by China Telecom and China Netcom, each of which exertsignificant influence over many of our major customers in China, may contributeto volatility in the price of our stock. In 2002, China Telecom completed its initialpublic offering, which has caused that entity to issue press releases morefrequently than in prior years. The price of our stock may react to suchannouncements. More recently, it has been reported that China Netcom has beenrestructuring its operations for its own initial public offering. More frequentpublic announcements from China Netcom relating to or resulting from theirinitial public offering could cause the price of our stock to become even morevolatile.

***SOFTBANK CORP. and its related entities, includingSOFTBANK America Inc., have significant influence over our management andaffairs, which it could exercise against your best interests.***

SOFTBANK CORP. andits related entities, including SOFTBANK America Inc. (collectively, “SOFTBANK”),beneficially owned approximately 12.8% of our outstanding stock as of March 31,2004. As a result, SOFTBANK has the ability to influence all matters submittedto our stockholders for approval, as well as our management and affairs.Matters that could require stockholder approval include:

·       electionand removal of directors;

·       mergeror consolidation of our company; and

·       saleof all or substantially all of our assets.

This concentration ofownership may delay or prevent a change of control or discourage a potentialacquirer from making a tender offer or otherwise attempting to obtain controlof our company, which could decrease the market price of our common stock.

***Delaware law and our charter documents containprovisions that could discourage or prevent a potential takeover, even if thetransaction would benefit our stockholders.***

Other companies mayseek to acquire or merge with us. An acquisition or merger of our company couldresult in benefits to our stockholders, including an increase in the value ofour common stock. Some provisions of our Certificate of Incorporation andBylaws, as well as provisions of Delaware law, may discourage, delay or preventa merger or acquisition that a stockholder may consider favorable. Theseprovisions include:

·       authorizingthe board of directors to issue additional preferred stock;

·       prohibitingcumulative voting in the election of directors;

·       limitingthe persons who may call special meetings of stockholders;

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·       prohibitingstockholder action by written consent;

·       creatinga classified board of directors pursuant to which our directors are elected forstaggered three year terms; and

·       establishingadvance notice requirements for nominations for election to the board ofdirectors and for proposing matters that can be acted on by stockholders atstockholder meetings.

***The holders of our convertible subordinated notes duein 2008 and we face a variety of risks related to the notes.***

Holders of ourconvertible subordinated notes due 2008 (the “notes”) and we face a variety ofrisks with respect to the notes, including the following:

·       wemay be limited in our ability to purchase the notes in the event of a change incontrol, either for cash or stock, which could result in our defaulting on thenotes at the time of the change in control and purchases for stock would besubject to market risk;

·       anevent of default under our senior debt, including one of our subsidiaries,could restrict our ability to purchase or pay any or all amounts due on notes,and after paying our senior debt in full, we may not have sufficient assetsremaining to pay any or all amounts due on the notes;

·       thereis no listed trading market for the notes, which could have a negative impacton the market price of the notes;

·       wehave significantly increased our leverage as a result of the sale of the noteswhich could have an adverse impact on our ability to obtain additionalfinancing for working capital;

·       hedgingtransactions related to the notes and our common stock and other transactions,as well as changes in interest rates and our creditworthiness, may affect thevalue of the notes and of our common stock; and

·       thenotes might not be rated or may receive a lower rating than anticipated byinvestors, ultimately having a negative affect on the price of the notes and ofour common stock.

**ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISKS**

We are exposed to the impact of interest rate changes,changes in foreign currency exchange rates and changes in the stock market.

*Interest Rate Risk   *Ourexposure to market risk for changes in interest rates relates primarily to ourinvestment portfolio. The fair value of our investment portfolio would not besignificantly affected by either a 10% increase or decrease in interest ratesdue mainly to the short-term nature of most of our investment portfolio.However, our interest income can be sensitive to changes in the general levelof U.S. interest rates since the majority of our funds are invested ininstruments with maturities less than one year. Our policy is to limit the riskof principal loss and ensure the safety of invested funds by generallyattempting to limit market risk. Funds in excess of current operatingrequirements are mostly invested in government-backed notes, commercial paper,floating rate corporate bonds, fixed income corporate bonds and tax exemptinstruments. In accordance with our investment policy, all short-terminvestments are invested in “investment grade” rated securities with minimum Aor better ratings. Currently, most of our short-term investments have AA orbetter ratings.

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Thetable below represents carrying amounts and related weighted-average interestrates of our investment portfolio at March 31, 2004:
| ** **                        | ** ** | **(As Restated)(1)**                                 | ** ** |
|-----------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                        | ** ** | **(in thousands, except  interest rates)** | ** ** |
| Cash and cash  equivalents        |       |                                                      | $          | 728,712 |   |   |
| Average interest  rate            |       |                                                      | 0.92       | % |   |
| Restricted cash                   |       |                                                      | 3,971      |   |   |
| Average interest  rate            |       |                                                      | 0.48       | % |   |
| Restricted short-term investments |       |                                                      | 26,893     |   |   |
| Average interest  rate            |       |                                                      | 1.07       | % |   |
| Short-term investments            |       |                                                      | 41,330     |   |   |
| Average interest  rate            |       |                                                      | 1.35       | % |   |
| Total investment securities       |       |                                                      | $          | 800,906 |   |   |
| Average interest  rate            |       |                                                      | 0.95       | % |   |

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(1)          See Note 24 to thecondensed consolidated financial statements.

*Concentrationof Credit Risk and Major Customers:  *The table belowoutlines our sales to, and the accounts receivable balances with respect to ourlargest customers:
| **For the three months  ended March 31,** | ** ** | ** ** | ** ** | **% of Net  Sales** | ** ** | **% of  Accounts  Receivable** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|-------------------------------|------------|-------------------------------------|------------|
| **2004**                                                           | ** ** |       | ** ** | ** **                    |       |                                | ** ** | ** ** |   |
| A                                                                  |       |       | 24         | %                             |       |                                | 15         | % |   |
| **2003**                                                           | ** ** |       | ** ** |                          |       |                                | ** ** |   |   |
| B                                                                  |       |       | 14         | %                             |       |                                | 1          | % |   |

 

The Company extends credit to its customers in Chinagenerally without requiring collateral. In global sales outside of China, theCompany often requires letters of credit from its customers. The Companymonitors its exposure for credit losses and maintains allowances for doubtfulaccounts.

*Foreign Exchange Rate Risk   *Weare exposed to foreign currency exchange rate risk because most of our sales inChina are denominated in Renminbi. Due to the limitations on convertingRenminbi, we are limited in our ability to engage in foreign currency hedgingactivities in China. Beginning in the first quarter of 2004, we hedge certainJapanese Yen-denominated balance sheet exposures against future movements inforeign currency exchange rates by using foreign currency forward contracts.Gains and losses on these fair value hedges are intended to offset gains andlosses from the revaluation of our Japanese Yen-denominated recognizedliabilities. In accordance with Statement of Financial Accounting Standards No. 133(“SFAS 133”), “Accounting for Derivative Instruments and Hedging Activities,”we recognize derivative instruments and hedging activities as either assets orliabilities on the balance sheet and measure them at fair value. The net resultof gains and losses on contracts and revaluation included in interest and otherincome (expense) was insignificant for the three months ended March 31,2004. Our foreign currency forward contracts generally mature within threemonths. We do not intend to utilize derivative financial instruments fortrading purposes. There were no foreign currency forward contracts held at March 31,2004. Movements in currency exchange rates could cause variability in our otherincome (expense).

 

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Although the impact ofcurrency fluctuations of Renminbi to date has been insignificant, fluctuationsin foreign currency exchange rates in the future may have a material adverseeffect on our results of operations. We maintain a bank account in Japanese Yenfor purchasing portions of our inventories and supplies. The balance of thisJapanese Yen account as of March 31, 2004 was approximately $43.1 million.

**ITEM 4—CONTROLS AND PROCEDURES**

**Evaluationof Disclosure Controls and Procedures**

UTStarcom, Inc. (the “Company”) maintainsdisclosure controls and procedures that are designed to ensure that informationrequired to be disclosed in the reports the Company files or submits under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms, and that suchinformation is accumulated and communicated to the Company’s management,including its Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”),as appropriate, to allow timely decisions regarding required disclosure.

As of the end of the period covered by the Company’sAnnual Report on Form 10-K for the year ended December 31, 2004(the “2004 Form 10-K”), the Company carried out an evaluation underthe supervision and with the participation of the Company’s management,including the CEO and CFO, of the effectiveness of the design and operation ofthe Company’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act. Based upon this evaluation, theCEO and CFO concluded that as of March 31, 2004 the Company’s disclosurecontrols and procedures were not effective because of the material weaknessesdescribed under “Management’s Report on Internal Control Over FinancialReporting” in Item 9A of the 2004 Form 10-K. Investors are directedto Item 9A of the 2004 Form 10-K for the description of thesematerial weaknesses.

The Company’s managementbelieves that the consolidated financial statements included in this QuarterlyReport on Form 10-Q fairly present in all material respects theCompany’s financial condition, results of operations and cash flows for theperiods presented and that this Quarterly Report on Form 10-Q doesnot contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this report.

**Management’sRemediation Initiatives**

In response to the mattersdiscussed in “Management’s Report on Internal Control Over Financial Reporting”in Item 9A of the 2004 Form 10-K, the Company plans to continue toreview and make necessary changes to the overall design of its controlenvironment, including the roles and responsibilities of each functional groupwithin the organization and reporting structure, as well as policies andprocedures to improve the overall internal control over financial reporting. Inparticular, the Company has implemented and/or plans to implement subsequent toMarch 31, 2004 the specific measures described below to remediate thematerial weaknesses described in “Management’s Report on Internal Control OverFinancial Reporting” in Item 9A of the 2004 Form 10-K.

***Material weaknesses described in item 1 of “Management’sReport on Internal Control Over Financial Reporting” in Item 9A of the 2004 Form 10-K***

*Remediation Initiatives.  *TheCompany’s failure to have a sufficient complement of personnel with a level ofaccounting knowledge, experience and training in the application of generallyaccepted accounting principles commensurate with the Company’s financialreporting requirements contributed to the Company’s failure to maintaineffective controls over the financial reporting process. To remediate thematerial weaknesses described in item 1 of “Management’s Report on InternalControl Over Financial 

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Reporting” in Item 9A ofthe 2004 Form 10-K, the Company has implemented or plans toimplement the measures described below, and will continue to evaluate and mayin the future implement additional measures.

1.     Generalplan for hiring and training of personnel—The Company’s planned remediationmeasures are intended to generally address this material weakness by ensuringthat the Company will have sufficient personnel with knowledge, experience andtraining in the application of generally accepted accounting principlescommensurate with the Company’s financial reporting requirements. Thesemeasures include the following:

(a)          The Company’s chieffinancial officer, with assistance from senior financial staff and outsideconsultants, other than the Company’s independent registered public accountingfirm, has reviewed and will continue to review and adapt the overall design ofthe Company’s financial reporting structure, including the roles andresponsibilities of each functional group within the Company;

(b)         The Company hiredregional controllers with relevant accounting experience, skills and knowledgefor each of the Asia-Pacific region, the Central America and Latin Americaregion, the Europe, Middle East and Africa region and Japan in late 2004 andearly 2005;

(c)          The Company hired aconsolidation manager in China with relevant accounting experience, skills andknowledge in February 2005;

(d)         The Company hired asenior manager for SEC reporting with relevant accounting experience, skillsand knowledge in February 2005;

(e)          The Company promoted anindividual within the Company with relevant accounting experience, skills andknowledge to become the controller of China operations in April 2005;

(f)            The Company retainedand intends to continue to retain the services of outside consultants, other thanthe Company’s independent registered public accounting firm, with relevantaccounting experience, skills and knowledge, working under the supervision anddirection of the Company’s management, to supplement the Company’s existingaccounting personnel;

(g)          The Company hired a vicepresident of finance for the Company’s China operations with relevantaccounting experience, skills and knowledge in April 2005;

(h)         The Company plans tocontinue to hire, and has allocated resources to hire, additional accountingpersonnel in the U.S., China and Japan, in the areas of tax, external financialreporting, revenue recognition, treasury, financial planning and analysis andcorporate accounting with relevant accounting experience, skills and knowledge;and

(i)            The Company in February 2005implemented an enhanced formal training process for the training of financialstaff and plans to continue this process to ensure that personnel have thenecessary competency, training and supervision for their assigned level ofresponsibility and the nature and complexity of the Company’s business.

2.     RevenueRecognition—The Company’s planned remediation measures are intended to addressmaterial weaknesses related to revenue and deferred revenue accounts andassociated cost of sales. The Company’s planned remediation measures includethe following:

(a)          The Company plans todesign a contract review process in China requiring financial and legal staffto provide input during the contract negotiation process to ensure timelyidentification and accurate accounting treatment of non-standard contracts;

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(b)         In March 2005, theCompany conducted a training seminar regarding revenue recognition, includingidentification of non-standard contracts, in the U.S., and, in April 2005,the Company conducted a similar seminar in China. Starting in May 2005,the Company plans to conduct additional training seminars in variousinternational locations regarding revenue recognition and the identification ofnon-standard contracts; and

(c)          At the end of 2004, theCompany began requiring centralized retention of documentation evidencing proofof delivery and final acceptance for revenue recognition purposes.

3.     InventoryManagement—The Company’s planned remediation measures are intended to addressmaterial weaknesses related to inventory, deferred costs, inventory reserveaccounts and cost of sales that have the potential of misstating inventory anddeferred costs and expected recoverability of inventory in future financialperiods. The Company’s planned remediation measures include the following:

(a)          The Company is in theprocess of continuing to upgrade and implement additional Oracle modules tomore effectively track inventory and evaluate deferred costs;

(b)         The Company implementedin late 2004, and plans to improve during the second quarter of 2005, itsprocess to confirm the existence of off-site inventory by systematicallyobtaining customer confirmations, investigating discrepancies in the confirmedresults, and properly recording and reporting the results of the investigation;

(c)          During the fourthquarter of 2004, the Company initiated a process to accumulate informationnecessary to evaluate inventory and deferred cost contracts for impairment. TheCompany plans to continue to enhance this process in 2005 by bettercoordinating the accumulation of such information from non-U.S. locations;

(d)         The Company plans toimplement in 2005 more robust controls over the release of costs to the incomestatement by better utilizing the Oracle system;

(e)          The Company is in theprocess of selecting a service provider with expertise and systems to moreeffectively manage and track the Company’s inventory in Japan, to whom theCompany plans to outsource this function in 2005; and

(f)            The Company plans todeploy the Oracle system in Japan by the third quarter of 2005.

4.     Accountingfor Goodwill—The Company’s planned remediation measures are intended to addressa material weakness related to the Company’s accounting for goodwill that hasthe potential of misstating goodwill amounts and the impairment of the Company’sgoodwill in future financial periods. The Company’s planned remediationmeasures include the following:

(a)          In the first quarter of2005, the Company implemented a process of reallocating goodwill to the Company’sfive reporting units in a manner reflective of the Company’s new organization;and

(b)         As part of the processdescribed in (a) above, the Company retained an outside consultant,working under the supervision and direction of the Company’s management, to assistin a valuation analysis that was used in the allocation process. The Companyplans to use the consultant on at least an annual basis to assist in avaluation and impairment analysis with respect to goodwill.

5.     ForeignExchange Translations—The Company’s planned remediation measures are intendedto address a material weakness related to the Company’s controls over itsprocesses and procedures related to the translation of its accounts andtransactions denominated in a currency other than U.S. dollars that has thepotential of misstating various accounts in future financial periods. TheCompany’s remediation measures include the implementation in the first quarterof 2005 of an enhanced foreign exchange accounting process utilizing the actualmonth-end exchange rates.

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6.     Recordingof Accrued Expenses and Open Purchase Orders—The Company’s planned remediationmeasures are intended to address a material weakness related to the Company’srecording of accrued expenses, primarily in China and Japan, that has thepotential of misstating accrued expenses and related income statement accountsin future financial periods. The Company’s planned remediation measures includethe implementation in the first quarter of 2005 of a process of enhanced reviewof open purchase orders and review of invoices and receipts after the end ofeach quarter to ensure proper recording of accrued expenses and open purchaseorder commitments.

7.     AccuratePreparation and Review of Financial Statements, Reconciliations, JournalEntries and Segment Reporting—The Company’s planned remediation measures areintended to address material weaknesses related to the financial close andreporting process that have the potential of preventing the accuratepreparation and review of the Company’s consolidated financial statements infuture financial periods. The Company’s planned remediation measures includethe following:

(a)          During the first quarterof 2005, the Company began to implement, and plans to continue to improve, newand enhanced procedures to ensure that non-routine transactions are identifiedand escalated to senior financial management during the close process to helpensure proper accounting treatment. Specific steps include training and ongoingmonitoring of financial staff, expansion of the officer sub-certifications andactive review of contracts by knowledgeable financial and legal staff, from thecontract negotiation process through recognition of revenue for such contracts;

(b)         During the fourth quarterof 2004, the Company implemented, and plans to continue to enhance, itsmonth-end closing procedures, including reconciliations and controls overspreadsheets, and standardized checklists to ensure such procedures areconsistently and effectively applied throughout the organization; and

(c)          The Company plans toenhance in 2005 the communication and distribution of its accounting policiesand procedures and development of a process to more effectively accumulate andanalyze information required for financial statement footnote disclosures.

8.     Income TaxAnalysis—The Company’s planned remediation measures are intended to addressmaterial weaknesses related to the calculation of its provision for incometaxes that have the potential of misstating the provision for income taxes andrelated balance sheet accounts in future financial periods. The Company’splanned remediation measures include the following:

(a)          The Company plans tohire and train additional experienced tax managers and supporting staff in 2005to closely monitor reporting from China and Japan, to assist in managing auditsand to monitor tax compliance in China and Japan;

(b)         During the first quarterof 2005, the Company utilized outside consultants, other than the Company’sindependent registered public accounting firm, to assist the Company’smanagement, working under its supervision and direction, in its analysis andcalculation of its income tax provision, and the Company plans to continue toutilize outside consultants, other than the Company’s independent registeredpublic accounting firm, to assist the Company’s management, working under itssupervision and direction, in its analysis of such matters in future periods;and

(c)          The Company plans todevelop a comprehensive process to accumulate and organize financial and tax dataused in connection with income tax calculation and reporting.

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9.     Utilization of Automated Controls—The Company’s plannedremediation measures are intended to address a material weakness related to thesegregation of duties and user access to certain Oracle business processapplications that have the potential of misstating of various accounts infuture financial periods. The Company’s planned remediation measures includethe following:

(a)          During the first quarterof 2005, the Company outsourced to a third-party expert the position of chiefsecurity officer to, among other duties, monitor access rights with respect tothe Oracle system and manage ongoing provisioning and changes;

(b)         The Company plans toimprove utilization of current functionality and continue to upgrade and expandfunctionality of the Oracle financial reporting system through utilization ofadditional modules to reduce manual procedures and the utilization ofspreadsheets;

(c)          The Company plans todeploy the Oracle system in Japan by the third quarter of 2005;

(d)         The Company is in theprocess of continuing to upgrade and implement additional Oracle modules tomore effectively track inventory and evaluate deferred costs; and

(e)          TheCompany plans to implement in 2005 more robust controls over the release ofcosts to the income statement by better utilizing the Oracle system.

***Material weakness described in item 2 of “Management’sReport on Internal Control Over Financial Reporting” in Item 9A of the 2004 Form 10-K***

*RemediationInitiatives.  *The Company’s failure to ensure that keymanagement fully understood the nature and potential significance of relatedparties and to ensure that a robust process for the identification of relatedparty transactions contributed to the Company’s failure to maintain effectivecontrols over the identification of and accounting for related partyrelationships and related party transactions with the Company. To remediate thematerial weakness described in item 2 of “Management’s Report on InternalControl Over Financial Reporting” in Item 9A of the 2004 Form 10-K,the Company has implemented or plans to implement the measures described below,and will continue to evaluate and may in the future implement additionalmeasures.

1.      TheCompany conducted an educational seminar with the Company’s key management in March 2005in which the Company’s internal and outside legal counsel and members of theAudit Committee reviewed certain key objectives of the Company’s Code ofConduct, including the identification, recognition and disclosure of relatedparty transactions.

2.      In thefirst quarter of 2005, the Company expanded the number of Company personnelrequired to certify to senior management with respect to identification,recognition and disclosure of related party transactions for SEC reportingpurposes, and revised the Company’s internal certification process concerningidentification, recognition and disclosure of related party transactions.

3.      TheCompany plans to continue to evaluate the Company’s procedures to ensure theidentification, recognition and disclosure of related party transactions.

4.      TheCompany plans to conduct periodic training sessions with key managers andsenior executives regarding the Code of Conduct, including the identification,recognition and disclosure of related party transactions.

5.      The Company plans to provide key managers and senior executiveswith access to legal and accounting personnel to enable such managers andexecutives to more accurately and comprehensively comply with the Company’sinternal certification process for SEC reporting purposes.

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***Material weakness described in item 3 of “Management’sReport on Internal Control Over Financial Reporting” in Item 9A of the2004 Form 10-K***

*RemediationInitiatives.  *Lack of clarity in roles and responsibilitiesin certain areas affecting the Company’s financial reporting structurecontributed to a material weakness relating to the monitoring of non-U.S.operations. To remediate this material weakness, described in item 3 of “Management’sReport on Internal Control Over Financial Reporting” in Item 9A of the 2004 Form 10-K,the Company has implemented or plans to implement the measures described under “—Materialweaknesses described in item 1 of ‘Management’s Report on Internal Control OverFinancial Reporting’ in Item 9A of the 2004 Form 10-K—RemediationInitiatives and Interim Measures—1. General plan for hiring and training ofpersonnel”, as well as those described below. The Company will continue toevaluate and may in the future implement additional measures.

1.      TheCompany streamlined the reporting structure between all non-U.S. accountingfunctions and the comparable groups in the corporate headquarters, includingtax, treasury and financial planning and analysis groups, in early 2005 toprovide for direct reporting to, and oversight by, the U.S. corporateheadquarters.

2.      TheCompany plans to expand the size of the internal audit group and the scope ofthe internal audit group’s responsibilities to monitor non-U.S. operationsthrough reviews and audits of such locations.

3.      TheCompany’s chief financial officer, with assistance from senior financial staffand outside consultants, other than the Company’s independent registered publicaccounting firm, has reviewed and will continue to review and adapt the overalldesign of the Company’s financial reporting structure, including the roles andresponsibilities of each functional group within the Company.

4.      The Company has implemented, and plans to continue to improve,a closing checklist to standardize its procedures for financial review toensure that U.S. reviewers monitor financial information from non-U.S.locations in a consistent manner, through such measures as use of standardizedreporting packages and review procedures.

***Material weakness described in item 4 of “Management’sReport on Internal Control Over Financial Reporting” in Item 9A of the 2004 Form 10-K***

*RemediationInitiatives.  *The Company’s failure to have sufficientpersonnel with knowledge, experience and training in the application ofgenerally accepted accounting principles commensurate with the Company’sfinancial reporting requirements contributed to a material weakness relating tothe Company’s control environment. To remediate this material weakness,described in item 4 of “Management’s Report on Internal Control Over FinancialReporting” in Item 9A of the 2004 Form 10-K, the Company hasimplemented or plans to implement the measures described under “—Materialweaknesses described in item 1 of ‘Management’s Report on Internal Control OverFinancial Reporting’ in Item 9A of the 2004 Form 10-K—RemediationInitiatives and Interim Measures—1. General plan for hiring and training ofpersonnel”, as well as those described below. The Company will continue toevaluate and may in the future implement additional measures.

1.      TheCompany streamlined the reporting structure between all non-U.S. accountingfunctions and the comparable groups in the corporate headquarters, includingtax, treasury and financial planning and analysis groups, in early 2005 toprovide for direct reporting to, and oversight by, the U.S. corporateheadquarters.

2.      TheCompany plans to expand the size of the internal audit group and the scope ofthe internal audit group’s responsibilities to monitor non-U.S. operations throughreviews and audits of such locations.

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3.      TheCompany’s chief financial officer, with assistance from senior financial staffand outside consultants, other than the Company’s independent registered publicaccounting firm, has reviewed and will continue to review and adapt the overalldesign of the Company’s financial reporting structure, including the roles andresponsibilities of each functional group within the Company.

4.      The Company has implemented, and plans to continue to improve,a closing checklist to standardize its procedures for financial review toensure that U.S. reviewers monitor financial information from non-U.S.locations in a consistent manner, through such measures as use of standardizedreporting packages and review procedures.

***Control deficiencies not constituting materialweaknesses***

In addition to thematerial weaknesses described in “Management’s Report on Internal Control OverFinancial Reporting” in Item 9A of the 2004 Form 10-K, managementhas identified other deficiencies in internal control over financial reportingthat did not constitute material weaknesses as of December 31, 2004. TheCompany has implemented and/or plans to implement during 2005 various measuresto remediate these control deficiencies and has undertaken other interimmeasures to address these control deficiencies.

**Changesin Internal Control over Financial Reporting**

There have been no significant changes in the Company’sinternal control over financial reporting during the quarter ended March 31,2004 that materially affected, or are reasonably likely to materially affect,the Company’s internal control over financial reporting. The discussion aboveunder “Management’s Remediation Initiatives and Interim Measures” describes thematerial planned and actual changes to the Company’s internal control overfinancial reporting subsequent to March 31, 2004 to address the materialweaknesses described in “Management’s Report on Internal Control Over FinancialReporting” in Item 9A of the 2004 Form 10-K.

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**PART II—OTHER INFORMATION**

**ITEM 1—LEGAL PROCEEDINGS**

On October 31, 2001, a complaint was filed inUnited States District Court for the Southern District of New York against us,some of our directors and officers and various underwriters for our initialpublic offering. Substantially similar actions were filed concerning theinitial public offerings for more than 300 different issuers, and the caseswere coordinated as *In re Initial PublicOffering Securities Litigation*, 21 MC 92. In April 2002,a consolidated amended complaint was filed in the matter against us, captioned *In re UTStarcom, Initial Public Offering SecuritiesLitigation*, Civil Action No. 01-CV-9604. Plaintiffs allegeviolations of the Securities Act of 1933 and the Securities Exchange Act of 1934through undisclosed improper underwriting practices concerning the allocationof IPO shares in exchange for excessive brokerage commissions, agreements topurchase shares at higher prices in the aftermarket and misleading analystreports. Plaintiffs seek unspecified damages on behalf of a purported class ofpurchasers of our common stock between March 2, 2000 and December 6,2000. Our directors and officers have been dismissed without prejudice pursuantto a stipulation. On February 19, 2003, the Court granted in part anddenied in part a motion to dismiss brought by defendants including us. Theorder dismisses all claims against us except for a claim brought under Section 11of the Securities Act of 1933, which alleges that the registration statementfiled in accordance with the IPO was misleading. A proposal has been made forthe settlement and release of claims against the issuer defendants, includingus. The settlement is subject to a number of conditions, including approval ofthe proposed settling parties and the court. If the settlement does not occur,and litigation against us continues, we believe we have valid defenses and weintend to defend the case vigorously. The total amount of the loss associatedwith the above litigation is not determinable at this time. Therefore we areunable to currently estimate the loss, if any, associated with the litigation.

We are a party to otherlitigation matters and claims that are normal in the course of our operations,and while the results of such litigation matters and claims cannot be predictedwith certainty, we believe that the final outcome of such matters will not havea material adverse impact on our financial position or results of operations.

**ITEM2—CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITYSECURITIES**

(e)  Stock repurchased for the quarter ended March 31,2004 is as follows:
| **Period**                                      | ** ** | ** ** | ** ** | **Total  Number of  shares  purchased(1)** | ** ** | **Average  purchase  price per  share** | ** ** | **Total  Number of  shares  purchased  as part of a  publicly  announced  program(1)** | ** ** | **Maximum  number of  shares that  may yet be  purchased  under  plans(1)** | ** ** |
|-------------------------------------------------|------------|------------|------------|-------------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
| January 1,  2004 - January 31, 2004   |       |       | —     |                                            |       |                                         | —     |                                                                                                       |       | —                                                                                          |       | — |   |
| February 1,  2004 - February 29, 2004 |       |       | —     |                                            |       |                                         | —     |                                                                                                       |       | —                                                                                          |       | — |   |
| March 1, 2004 - March 31,  2004       |       |       | 2,568,000  |                                            |       |                                         | $          | 30.43                                                                                                      |       |                                                                                            | 2,568,000  |   | 4,055,000 |   |
|                                                 |            |            |            |                                                 |            |                                              |            |                                                                                                            |            |                                                                                                 |            |  |  |  |  |  |

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(1)          OnMarch 12, 2004, the Company announced a program to repurchase up to5,000,000 shares of its outstanding common stock over a period of six months,until September, 2004 (the “Repurchase Program”). In addition, the Companyannounced the repurchase of an additional 1,623,000 shares of its outstandingcommon stock in a privately negotiated transaction with an institution (the “PrivateRepurchase”). The Private Repurchase was completed in March, 2004. “TotalNumber of Shares Purchased” and “Total Number of Shares Purchased as Part ofa Publicly Announced Program” 

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reflect the PrivateRepurchase and an additional 945,000 shares repurchased pursuant to theRepurchase Program in March, 2004.

**ITEM 3—DEFAULTS UPON SENIOR SECURITIES**

[None.]

**ITEM 4—SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

[None.]

**ITEM 5—OTHER INFORMATION**

Our directors, officers,or employees have entered, and may from time to time enter, into good faithtrading plans pursuant to SEC Rule 10b5-1(c).

**ITEM 6—EXHIBITS AND REPORTS ON FORM 8-K**

(a)  Exhibits:
| NUMBER    | ** ** | ** **                                                                                                                                          | ** ** | **EXHIBIT DESCRIPTION** |
|-----------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|
| 10.97*(1) |       | Infrastructure Equipment License Agreement between  Qualcomm Inc. and UTStarcom, Inc., dated January 30, 2004                             |
| 10.98*(1) |       | Subscriber Unit License Agreement between Qualcomm  Inc. and UTStarcom, Inc., dated January 30, 2004                                      |
| 10.99*(1) |       | Asset Purchase Agreement among Hyundai  Syscomm, Inc., 3R Inc., Dr. Seong IK Jang and UTStarcom, Inc.,  dated February 26, 2004 |
| 31.1      |       | Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                                                       |
| 31.2      |       | Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                                                       |
| 32.1      |       | Certification pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                  |

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*                    Portions ofthe exhibit have been omitted pursuant to an order granted by the Securitiesand Exchange Commission for confidential treatment.

(1)          Previouslyfiled with the registrant’s Quarterly Report on Form 10-Q for thequarter ended March 31, 2004, as filed with the Securities and ExchangeCommission on May 10, 2004.

(b) Reports on Form 8-K:

1.                Report on Form 8-Kdated and filed on January 7, 2004 under Item 5 and Item 7, relating tothe Company’s 2003 Nonstatutory Stock Option Plan and the RollingStreamsSystems, Ltd. 2001 Stock Plan which the Company assumed.

2.                Report on Form 8-Kdated and filed on January 13, 2004 under Item 5 and Item 7, relating to aform of Underwriting Agreement between the Company and Banc of AmericaSecurities LLC and the First Amended and Restated Bylaws of the Company.

3.                Report on Form 8-Kdated and filed on January 22, 2004 under Item 5 and Item 7, relating tothe Company announcing its results of operation for the fourth quarter of 2003and the full year ended 2003.

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                               | UTSTARCOM,  INC. |
|-------------------------------|------------------|
| Date: June 3,  2005 | By:              | /s/ HONG LIANG LU |
|                          |             | Hong Liang Lu |
| * *                      |             | *President, Chief Executive Officer and Director* |
| * *                      |             | *(Principal Executive Officer)* |
| Date: June 3,  2005 | By:              | /s/ MICHAEL J. SOPHIE |
|                          |             | Michael J. Sophie |
| * *                      |             | *Executive Vice President, Chief Operating  Officer, and Acting Chief Financial Officer* |
| * *                      |             | *(Principal Financial Officer)* |

 

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**UTSTARCOM, INC.EXHIBIT INDEX**
| NUMBER    | ** ** | ** **                                                                                                                                          | ** ** | **EXHIBIT  DESCRIPTION** |
|-----------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|
| 10.97*(1) |       | Infrastructure Equipment License Agreement between  Qualcomm Inc. and UTStarcom, Inc., dated January 30, 2004                             |
| 10.98*(1) |       | Subscriber Unit License Agreement between Qualcomm  Inc. and UTStarcom, Inc., dated January 30, 2004                                      |
| 10.99*(1) |       | Asset Purchase Agreement among Hyundai  Syscomm, Inc., 3R Inc., Dr. Seong IK Jang and UTStarcom, Inc.,  dated February 26, 2004 |
| 31.1      |       | Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                                                       |
| 31.2      |       | Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                                                       |
| 32.1      |       | Certification pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                  |

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*                    Portions ofthe exhibit have been omitted pursuant to an order granted by the Securitiesand Exchange Commission for confidential treatment.

(1)          Previously filed withthe registrant’s Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2004, as filed with the Securities and Exchange Commission on May 10,2004.

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